Adrian Ringrose bows out as chief executive of Interserve after 14 years at the end of the month, at a time when the shares in this contractor and outsourcer remain at or around an eight-year low. There are a number of areas of difficulty and the picture remains clouded at several of them.
The main error was the disastrous decision to get into building energy-from-waste plants in 2012: a number of the six contracts have gone badly wrong and Interserve has been replaced as contractor on one of them. The company is now out of that market and taking on no new work, at the cost of a writedown of £160 million in the 2016 figures, and while we are assured that this should be enough to contain the damage, there can be no guarantees.
The equipment services side trundles on with attractive margins. The difficulties are within UK construction and support services overseas. The latter has been hit by the downturn in work from the oil and gas industry and costs have been cut back, resulting in a swing back from losses in the second half of last year to a small first-half profit.
In UK construction, Interserve is battling a competitive market and some poorly performing legacy contracts, though the first-half loss of £2 million is an improvement on the £7.5 million lost in the second half. UK support services is, along with the others in the sector, seeing margins hit by higher staff costs such as the national living wage and the apprenticeship levy.
Progress is therefore being made in almost all of those problematic businesses, and there is probably a degree of bad luck in them all hitting at the same time. The final dividend for 2016 was understandably axed and there is no interim payment, to lessen the pressure on the balance sheet.
The main negatives are a higher level of debt, an average for the year of £475 million to £500 million coming in about £25 million higher than expected and the continuing cash drag from the energy-to-waste contracts.
The current board insists that it can ride this out without any threat to banking covenants, given that borrowing facilities have been extended. The shares, 3¼p down at 220p, and on less than four times earnings, look ridiculously cheap and might be attractive to gamblers.
The risk is that the new chief executive, Debbie White, is an unproven quantity and might also be tempted to wipe out the debt with a discounted rights issue.
My advice Avoid
Why The share-price plunge may represent a long-term buying opportunity but there are too many uncertainties, not least the level of debt
Stock Spirits Group
Stock Spirits has now largely completed the revamp of its Polish operations, comprising about half the business of this maker and distributor of spirits, even if the benefits are not yet entirely through. This was the subject of a nasty profit warning at the end of 2015 after a price war with its main competitor broke out. The revamp, one of several changes urged on the company by an investor, involved a degree of repricing and rearrangement of the sales force.
Volumes in Poland are moving up again, but Italy, where widespread youth unemployment has meant less spending on one of its biggest brands, still requires some work. Stock Spirits has recently bought a share in an Irish whiskey producer whose range can be sold through its network in eastern Europe.
The halfway figures show a considerable improvement. On revenues up by only 3 per cent, operating profits moved ahead by 32 per cent to €16.5 million, helped by more than €2.5 million of savings in the first half and with more to come. The shares, up 16¼p at 174½p, are still well below the 235p at which they were floated in late 2013. They sell on less than 13 times this year’s earnings, but there seems no obvious catalyst for a further rise.
My advice Avoid
Why The shares already seem fully rated
Hastings Group
One of the concerns over Hastings had been the overhang of the shares owned by Goldman Sachs, which had 45 per cent of the insurer, and by the founding investors. Those concerns were largely dissipated in March when RMI, a South African investment manager with a penchant for insurance stocks, bought a near-30 per cent stake, most of it from Goldman, whose holding is now a more manageable 15 per cent.
RMI bought in at 248p and can have few complaints; the shares slipped back 1¾p to 320p after a set of halfway figures that showed progress on almost all fronts.
Hastings, which sells itself through price comparison websites, reckons to have done well out of the Ogden changes to insurance premiums last year, even if these meant a £20 million hit for 2016 because the abrupt rise in motor premiums meant that policyholders were more inclined to shop around.
The number of policies rose by 15 per cent. The various financial metrics were attractive enough. The combined operating ratio, the difference between money coming in through premium and other income and money paid out, was 88.9 per cent. The Solvency II ratio, measuring surplus capital, was ahead of the company’s targets at 173 per cent, which will mean that the extra cash can be used to reduce debt.
On one measure, the shares look expensive, the price being 3.6 times net tangible asset value. An earnings multiple of almost 16 looks in line with the sector. Worth having for the potential for further growth.
My advice Buy
Why Business model brings potential for further growth
And finally . . .
Numis Securities is encouraged by the read across from second-quarter figures from Penumbra, an American pharmaceuticals group, to BTG, the London-listed company arguably if unfairly best known for its snake venom treatment. Penumbra, which lifted revenues by a quarter, and BTG overlap in places, in particular in less invasive treatments for blood clots through the latter’s Ekos treatment. This is part of BTG’s interventional medicine division, the fastest-growing part of the business.
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