Interserve Share Discussion Threads

[fenners66] 10/8/2018 15:03

CC2014

The challenge is that if you run this line of thinking then the profitability in equipment services is being flattered by the exchange rate

That is my point 3 above

So DID they mention the FX in the overseas work ?

[cc2014] 10/8/2018 14:17

Hi guys. I am about and about so will be brief. I think but can't check right now the 8m usd is on the usd loan. What we also need to appreciate is that much of the overseas work will be priced in usd or other local currency. The profits on this when translated into Pounds are benefitting massively from the weak pound So there is a balancing number in the divisional performance which partly offsets the usd loan. It might even exceed it! The challenge is that if you run this line of thinking then the profitability in equipment services is being flattered by the exchange rateAs an aside it is my personal view that long term cable will not stay down here. I see cable as strengthening which would help

[fenners66] 10/8/2018 13:45

unclejr - I knew that they were forced out of the swaps - it was discussed at the time that it would leave them exposed a risk that is (at the moment) coming home to roost.

Again they awarded themselves huge bonuses for "sorting out the finances" - however this is now starting to show as not sorted at all but merely kicked down the road on a prayer.

However what I do not know yet is
1, why there were US $ denominated loans in the first place
2, when re-financing the whole package especially given the FX exposure - why not translate them into GBP ?

I could speculate (as I have not looked this up) that some financial genius thought that middle eastern sales in US$ perhaps would fund the US$ borrowings without translating ?
Maybe they bought middle eastern businesses in US$ ?
Perhaps they believe that future middle east income would mitigate - however have they declared a FX gain from this source ?
If you only highlight one side of the FX then its either
1, a mistake,
2. or it was a mistake in thinking it was effectively hedged ,
3, you want to shunt cost to not underlying - whilst hoping to hide the gain in underlying
4, they don't want to say explicitly that the forecast income / receipts are way lower and things have worsened.

5 I could have that all wrong.......

[unclejr] 10/8/2018 12:44

Fenners, the US$ debt was already in place but Interserve had hedged the currency risk with cross currency swaps. These swaps were heavily in the money following the depreciation of the GBP (post brexit) and the banks forced them to close the swap to bring down leverage as part of waiving covenants.

I can only suspect that none of the lenders were willing to take on new cross currency swaps as part of the refinancing as these can take up huge limits (if Interserve defaults and the currency has moved in the wrong direction the bank effectively takes the hit on the out of the money swap position).

So the net result is that Interserve finds itself holding a huge naked position on the USD and, while forced upon them, it is now jeopordising any potential turn around. What's worse is that they have limited options to mitigate this risk in the short term as 1) banks are probably less likely now to double down and take on cross currency exposure 2) purchasing long dated GBP/USD put options would be incredibly expensive and they simply dont have the cash to fund these.

In my view, the only thing interserve and shareholders can do now is pray the the pound does not keep falling.

[fenners66] 10/8/2018 10:39

£ down to about $1.2775 so the reduction from $1.32 continues (it was lower )

So on $350m debt that equates to another £8.8m as of today.

The " Group secured committed borrowing facilities of GBP834 million in April of this year (including $350 million denominated in US$)"

Once again why in US$?

[fenners66] 10/8/2018 01:21

"aendjo
9 Aug '18 - 21:30 - 9741 of 9742

Fenners, with all due respect, your figures are wrong.

Finance costs for the year are going to be be 80m in 2018 - the peak net debt was in the first half of 2018 so that cost should start to reduce from that figure."

Look again aendjo I already illustrated the circa £100m figure.

Whilst the company has INCREASED its estimate of the finance cost for 2018 to £80m for the year the first half was only £31.1m

So the second half by definition is £48.9m.



Therefore a full year run rate is circa £100m - notice they do not give a forecast of next year's finance cost.

Also this is higher in the second half - because the high rate finance deal was implemented during the first half - not at the start of the year so the second half has a full 6 months.


Whilst we can speculate at the loan FX movement between now and whenever - we do know what its costing at the moment - another £8m so all things being equal that is where it is.


I did ask the question - and have not looked it up yet - but why was the debt raised in US$ in the first place ?

We all believe there will be further restructuring and cost cutting to come - so more cost before there is any benefit.
Companies love boxing off these costs as not underlying or exceptional and to be ignored - however they cost cash and are real losses to apply to the balance sheet.

It is also a well worn route trying to shunt costs into the exceptionals pot and explain losses away - whilst a closer scrutiny could find they are not always one-offs.

[aendjo] 09/8/2018 21:30

Fenners, with all due respect, your figures are wrong.

Finance costs for the year are going to be be 80m in 2018 - the peak net debt was in the first half of 2018 so that cost should start to reduce from that figure.

In regard to the exposure to USDGBP fluctuations, clearly there is a possibility that the GBP will continue its free fall but I don’t think that’s particularly likely.

On EfW - all plants are burning, with cash coming in as milestones are met and we are being told with some confidence that a big lump of cash is coming in through insurance receipts.

The 46m are restructuring costs - mostly redundancies rather than consultant fees, if I understand correctly cross referencing fy2017 results and hy2018 slides.

As of January 2018, assuming trading continues to be “in line with management expectations” - the company will be sitting on 575m net debt.

If the 15-50m of margins mooted in FFG can be achieved, then cash flow will be sufficient to trade and reduce principal over 3/5 years.

The bit that I struggle with is how you get it from 575 to 450 from December 2018 to June 2020. DW kept her cards close to her chest on the subject.

[fenners66] 09/8/2018 18:17

5% margin on £3bn = £150m
Finance cost run rate £100m
Cost of FX on US $ debt - £8m so far
Cost of EFW ?
Cost of restructuring?
Any shortfall from £3bn ?
No dividends for .....
Clock ticking on the debt or what another £46m agents fees... ?

So not even that gets them anywhere at all.

[aendjo] 09/8/2018 17:10

Jeffian,

it is a possibility that selling parts of the business and a dilutive rights issue may become a necessary in the next 12-18 months. Especially if the many pies-of-tomorrow we've heard about come out half baked.

It's also a possibility that achieving a 5% margin on a 3+ billion revenue may allow the company to trade out if its debt. There are huge possibilities in target markets following the demise of Carillion.

Either way, when I look at the value of Interserve's parts and subtract its debt, I estimate fair value at least twice of current valuation.

Potofgold,

congratulations on your position. I am holding but will be keeping a close eye on progress.

I believe this is going to be an epic turnaround story. It still is a very high risk proposition.

[jeffian] 09/8/2018 16:32

aendjo,

I promised not to stick my nose in here again but I must come back on this -
"evidently shorters are still betting on the prospect of the company collapsing under the weight of its debt." It's not a question of the company "collapsing", it's a question of the terms of the necessary refinancing and what will be left for existing shareholders. As I kept saying before, if the company 'recovers' it won't look anything like the company we see today - it will have sold off substantial parts to repay debt and it will have significantly more shares in issue, and issued at an unknown price at the moment.

[potofgold1] 09/8/2018 16:20

Aendjo, are you still a hold and do you still have faith in the turnaround? Currently have a similar number of shares as you at 71p. Thanks

[potofgold1] 09/8/2018 16:19

Aendjo, are you still a hold and do you still have faith in the turnaround? Currently have a similar number of shares as you at 71p. Thanks

[aendjo] 09/8/2018 15:50

Dear Obi,

evidently shorters are still betting on the prospect of the company collapsing under the weight of its debt.

I have mixed feelings about HY2018 results. Many positives but as of today debt is still too high, with guidance for year end net debt of 575m.

Cash generation is expected to be 45 to 70m in second half. A big chunk of that money should come from insurance receipts for Glasgow and Derby (32m). There was also mention of a business being sold, in reference to a non-recurring 15m impairment of assets. So cash generation is thought to be ok.

In terms of cost efficiencies, 1300-1400 redundancies and 40 less leases on buildings are going to deliver some significant improvements. Change in pension indexation generated 67.8m of non-cash gain that will be realised beyond 2022 - but effective immediately and for at least a couple of years there will be minimal outflow of cash for pensions. I was very pleased with mobilisation of the largest ever contracts for DWP and DfT - with both contracts already margin positive 3 months in.

Finance costs are very high (40m cash and 40m non-cash). It is important to bear in mind this is not all interest. An aspect that could be reasonably easy to fix is improving the efficiency of the balance sheet - the have 194m of cash on which they are paying 10% of interest.

So overall good improvement but still a very risky set of numbers. Time will tell, but there is not much of it to significantly strengthen the balance sheet.

[fenners66] 09/8/2018 10:39

We have not mentioned short tracker for a while - but you are right its showing shorts back up to 8.31%
In April it got down to 5.16%.

[obiwoncanary] 09/8/2018 10:23

Hi aendjo, I’m still here waiting for shorts to close. I’m baffled as to why shorts aren’t closing and moreover why they increased when at levels of mid 60’s... for me it remains a game of chess waiting for shorts to close out and I turn see the share price rocket

[aendjo] 09/8/2018 08:02

A fair commentary in my opinion.

[cc2014] 08/8/2018 12:47

7 AUGUST, 2018
David Price
David Price

COMMENT
Today was a big day for Interserve.

It was its first complete half-year under chief executive Debbie White, its first accounts since securing a £834m refinancing lifeline, and the first results since its huge £244m loss for 2017.

Did Ms White and her chief financial officer Mark Whiteling defy the odds, put Interserve back on course and silence critics of the 125 per cent bonuses they received after just a few months in their posts?

Not exactly: the company reported a £6m pre-tax loss for the first half of 2018.

Its underlying operating profit, excluding one-off items, also slumped 29 per cent compared with the same period of 2017 to £40.1m.


Interserve is a huge operation, one which the current management admitted has a number of inefficient systems and problem contracts.

Turning such a business around was never going to be completed in the 10 months Ms White has been in her post.

Today the CEO said progress had been made in the problem areas of EfW, divisional profitability and debt, but each came with a caveat that took the shine off the improvements.

The company’s four remaining EfW plants are on course for handover by the end of 2018, but both Ms White and Mr Whiteling made clear this would not necessarily mark the end of the story.

Interserve will bear liability for certain issues that could arise from the commissioning and operation of the plants beyond 2018.

The hope Ms White voiced in April that the EfW saga would be “done” by the end of the year looks to be in the dust.

Another burden that will weigh on Interserve for some time is, of course, debt.

The £834m refinancing finalised in April was needed to avert disaster, but whether it secured the company’s long-term future or just kicked the can down the road is still not clear.

Net debt stands at £613m and is not expected to be any lower than £575m by the end of 2018.

It’s important to remember that as part of its refinancing covenants, the company needs to pay off around £200m within the next two years.

If paying down this principal wasn’t hard enough, Interserve must also service the finance cost, which one analyst said today was higher than expected and will be around £80m for the whole year.

This needs to be covered largely by operating profit, which of course must also cover any further losses incurred on its EfW plants.

For this to happen the company needs its three divisions – construction, services and equipment – to all perform strongly.

So far this year they do not appear to have fared particularly well.

Revenue for all three divisions has fallen, which isn’t necessarily a bad thing if the work being done is more profitable.

But this hasn’t been the case for the first six months of the year, and operating margins are lower for every division than they were for the same period of 2017.

Today’s progress report looks like that of a company still dealing with significant problems from its past while trying to prepare for reckonings in its near future.

Falling margins – at a time when it needs to be as profitable as possible to pay down debt and cover potential future losses – does Interserve no favours.

Crunch time for Interserve may not be imminent, but the window for it to turn things around is closing – and today’s figures suggest there’s some way to go.

[fenners66] 08/8/2018 12:13

"Finance expenses more than trebled from £9.6m last year to £31.1m by the end of June 2018. The company is forecasting finance costs of around £80m for the whole of 2018"

So when you look at finance costs for the second half - that is £48.9m

That is a yearly run rate of £97.8m !!

Finance costs of say £100m a year and everyone believes that with spending £46m on fees they have saved the company ....... erm ......

[fenners66] 08/8/2018 12:09

Actually instead of me copying bits of the article - which picks up some of the points we have covered - its worth a read.

[fenners66] 08/8/2018 12:07

From construction news

EFW is still a problem

Interserve’s problem energy-from-waste projects made an £11.6m loss in the first half of 2018.

The four remaining plants at Derby, Dunbar, Margam and Rotherham are due to be handed over to clients by the end of 2018.

However, even after the plants are commissioned and operational, Interserve could still face liabilities for any problems down the line.

“Risks don’t end after handover,” chief financial officer Mark Whiteling told analysts at this morning’s results presentation.

This contrasts with what the company signalled in April, when Ms White said she hoped a line could be drawn under the EFW projects by the end of 2018.

[unclejr] 08/8/2018 11:19

I had been a believer in the turnaround and held firm the last 6 months but I just exited a fairly material position. My only consolation was that I had averaged down during the worst of times so I exited at a small loss. Nevertheless, I was convinced this was going to be above £1.20 by now so this is disappointing to say the least.

The final straws for me where 1) the naked GBP/USD exposure on the US$ debt 2) solwer than expected progress on Energy from Waste 3) Debbie hinting at a Q3/4 capital raise 4) the deteriorating performance from Equipment Services

On point 1, the currency continues to move against them. In the first half the depreciation of the GBP from 1.35 to 1.32 increased debt in GBP terms by $8m. Given the pound is now trading at 1.29 they are currently looking at a further £8M increase (effectively wiping out the entire first half benefit of fit for growth.I didnt invest in interserve to speculate on GBP/USD movements (I can do that separately if I want).
On point 2, the news out of Derby is not good (see 3) When asked about the preferred debt position Debbie seemed to suggest the board were considering strategic options that would be revisited in Q3/Q4. In my view this is most likely an equity raise which would be devastating to future equity prospects given the quantum of shares that would need to be raised and 4) the results from Equipment services were dissapointing. This had been the rock of the Interserve group and it too is now facing revenue/margin pressure.

Finally I am placing no value in broker estimates (I never really do) but if a cap raise is being considered all the IB's will be hard at work pitching for this and so their analysts will no doubt be pushing the stock.

I believe there is no longer any margin for error. Any number of things could easily wipe out a huge chunk of equity so it was time for me to protect my capital and get out. I truly hope the best for all those committed holders. Good Luck!

[aendjo] 08/8/2018 10:24

JP Morgan Cazenove raised its target price to 95p, with a neutral recommendation. That’s the fourth broker to issue a recommendation since HY2018 results, two hold and two buys.

[aendjo] 08/8/2018 09:37

Dear all,

Not a terrible set of results but nothing stellar, either.

Net debt is still way too high (575-600m year end 2018) and so is interest (80m). As part of its lending covenants, IRV needs to reduce net debt to 450m in the next two years.

It is my interpretation that further disposals are going to have limited impact. So IRV needs to generate 150m of profit (75m per year) over the next two years. That’s EBITDA > 155m. Even if FFG is progressing well, that seems optimistic. Refinancing will be a necessity.

[skyblue5] 07/8/2018 21:41

These will get kicked off accounts as they are holding back PO's to make P&L look good month by month. They need more restructuring than they think.