Is Interserve plc a falling knife to buy after 40% fall?


Shareholders in Interserve(LSE: IRV) have been having a tough time, but it got a whole lot worse Thursday after the company released a shock profit warning. 

September's update had looked ominous enough: "Trading in the UK in July and August was disappointing, particularly in support services, but also in the construction division. As a result of this, the board now believes that the outturn for the year will be significantly below its previous expectations."

The latest revelation was of a further slowdown in the third quarter, with costs being the big deal for the firm's support services, while its construction business has been hit by delivery issues (in addition to cost problems).

On the brighter side, Interserve's equipment services business is said to be doing well, and even improving in the second half -- but that will be cold comfort for investors.

Price crash

The immediate result was a 40% price crash in early trading, with the shares slumping to a low of 53p -- they had closed at 90p on Wednesday.

The longer-term picture is one of carnage, with the shares now down more than 90% since a peak of more than 750p in March 2014. The question has to be, is there a way back?

Analysts had been expecting a 25% fall in earnings per share (EPS) this year, but the firm has told us that it now expects "operating profit for the overall group in the second half to be approximately half the level of that which was reported in the second half of last year."

There had been a small EPS uptick forecast for next year, though that is surely going to be revisited now. And there are growing doubts over whether Interserve will even survive in its current form for that long.

Unmanageable debt?

What could be the killer is the revelation that "we now believe there is a realistic prospect that we will not meet the net debt-to-EBITDA test contained in our financial covenants for 31st December 2017." And that's a biggie, after the September update had suggested that financial covenants should still be safe.

Average net debt for the year is expected to be around £475m to £500m, and that massively exceeds the company's market cap of a mere £80m based on the share price at the time of writing.

The company is talking of "launching a group-wide performance improvement plan," and it's saying various things about improving margin performance and addressing its operating model and its cost base.

Recovery prospects

It does sound like there's some viable business here, with the firm speaking of an order book of £7.4bn, chief executive Debbie White extolling the virtues of "a strong client base" and saying she believes "there is considerable potential for business improvement across the company."

I suppose a company has to try to put a brave face on things at time like these -- but I get a picture of the captain of the Titanic standing on the deck shouting "don't worry, folks, most of the ship hasn't got any holes in it at all."

Even if Interserve should survive this latest crisis, whatever is left of the business is effectively owed to its creditors -- and I can't see an obvious solution now that would leave much for existing shareholders.

A million by retirement

Interserve is not something I'd be stashing away in my SIPP in the hope of a comfortable retirement. But there are plenty of shares out that that I would buy now.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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