12th Aug 2015 12:12
LONDON (Alliance News) - FTSE 250 construction and support services company Interserve PLC posted a rise in half-year profit on Wednesday on the back of robust revenue growth and a stronger order book at the end of the period, though it expects its UK support services business to see margins squeezed by the UK's new National Living Wage.
The company said its pretax profit for the six months to the end of June was GBP33.7 million, up 19% on the GBP28.3 million posted a year earlier, as revenue increased by 16% to GBP1.60 billion from GBP1.37 billion. Interserve said its order book stood at GBP8.3 billion at the end of the half, up 11% from the GBP7.5 billion it had on its books a year earlier, as it won GBP2.0 billion new contracts over the half, including with London Underground, along with oil and gas-related deals in Oman and Qatar.
The group said it would pay an interim dividend of 7.9 pence per share, up from 7.5p a year earlier.
Chief Executive Adrian Ringrose said the implementation of the UK National Living Wage, announced in the Summer Budget, will have an initial adverse impact on its UK support services margins of around GBP10 million to GBP15 million in 2016, with this to ease over coming years. He also said conditions in the UK construction market remain challenging, though demand has continued to improve over the first half.
The company said it is considering a number of potential measures to mitigate the impact of the National Living Wage, but said until its contract pricing can be adjusted, it will not be able to recover all of the additional costs it will incur due to the changes.
"We have made good progress in the first half of the year in markets that offer both opportunities and challenges. We have delivered volume growth across the board, and strong profit performances in our Support Services, Equipment Services and International Construction businesses," Ringrose added.
Interserve reiterated its guidance for the current financial year and is looking to make further progress in 2015. It said it will have to continue to carefully manage the risks in the contracting environment but is confident on its medium-term growth outlook given its good market positioning.
"Demand in our main markets continues to strengthen, our financial position remains strong which, together with our growing future workload, underpins the board's confidence in our positive outlook," Ringrose added.
Numis analyst Howard Seymour said the hit the group will take from the National Living Wage should not be taken out of context, as while Interserve's ability to pass on the costs in the first year will be limited, it should only have a minimal impact thereafter and does not detract from the sector-leading organic growth prospects Interserve offers.
Seymour said any weakness in Interserve's share price should be considered a buying opportunity given Interserve's price-earnings discount to the sector along with its dividend yield attractions and its robust operational outlook.
Interserve shares were down 4.3% in early afternoon trade on Wednesday to 598.50 pence, one of the worst performers in the FTSE 250.
Interserve said its support services business performed well in the first half, with revenue growth seen in both its UK and international operations, the latter of which focuses on the Middle East oil and gas industry. UK revenue was up by 15% in the half, while international revenue rose 35%.
The UK business was boosted by a strong performance in the transport sector, where the company won contracts for Crossrail and the Docklands Light Railway, along with extension to its existing contract with London Underground. The retail sector also provided robust in the half, with an extension to its deal with DIY retailer B&Q and to its contract with department store Debenhams.
Interserve's public sector support services unit is undergoing significant changes, following the loss of its South East Regional Prime deal in 2014 and the reduction to its Ministry of Defence National Training Estate deal. The group is working to build up the business, with a focus on delivering frontline services in the healthcare, welfare-to-work, skills and justice sectors.
Revenue in the Middle East was boosted by a focus on servicing essential production facilities and providing health and safety training in the half, as the group works to expand the reach of its Middle East business in order to diversify its revenue streams to offset any slowdown in the oil and gas industry resulting from the lower oil price.
In its construction arm, Interserve posted higher revenue in its UK and international operations, but saw profit fall and margins deteriorate in its UK business amid challenging market conditions and supplier cost inflation. The group said that while tender pricing is improving and the risks involved with supply chain insolvencies and pricing inflation are easing, margins are expected to remain tight in the short term.
Notwithstanding the margin squeeze on the UK construction business, Interserve said it remains confident on the unit, with its order book increasing to GBP1.7 billion from GBP1.4 billion year-on-year at the end of June, boosted by a contract to build the Defence and National Rehabilitation Centre at Stanford Hall, further wins in the energy-from-waste market and a schools building contract in England.
Middle East construction performed better than its UK counterpart, with its rise in revenue accompanied by better profit and stronger margins. The group said demand was stronger across the region, boosted by major projects such as Qatar's Vision 2030 long-term development strategy and the United Arab Emirates' plans for Expo 2020 event.
Interserve's equipment services unit performed well, with revenue, profit and margins all improving on the back of robust growth in Asia-Pacific, particularly in Hong Kong and the Philippines, and a strong result from the Middle East thanks to demand coming from long-term infrastructure projects. It also benefited from the increased confidence in UK construction markets, both in the road and rail sectors.
By Sam Unsted; [email protected]; @SamUAtAlliance
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