Interserve Final Results

Interserve (IRV) which I wrote up recently and talked about on a Podcast, served up their final results today which were mixed against the consensus. This was because the turnover was slightly light at £3204.6m v £3321 (F) although the earnings did come in ahead at 67.9p v 63.8p which they said represented 15% growth and suggested that margins may have been slightly better than expected. While on the income side we saw 6% increase in their full year dividend to 24.3p which was 0.1p behind the consensus.

In the statement they highlighted that they have a future workload of £7.7 billion which offers some good visibility as it represents more than two years turnover at the current rate. While in their viability statement they also highlighted the the long-term secured nature of the Group's work with £4.6 billion of work already secured in the order book until the end of 2018.

They did however flag a post election slowdown in domestic business and while they did acknowledge more difficult conditions in the Middle East on the back of current weak oil prices. Aside from that current trading and orders in that region remained strong and they seemed sanguine about the medium term outlook there too.

In addition against a backdrop of substantial strategic progress and the changing shape of their business towards more service and facilities management, they announced a strategic review of their Equipment Services business (RMD Kwikform) which is one of their smaller but more profitable businesses. This suggests to me that they will look to dispose of this business which doesn't fit so well now (apart perhaps with their construction business) and the proceeds could be quite useful in paying down some or all of the debt they currently have which they took on in acquiring Initial Services. However since it made 32% of the groups operating profits this year on the back of a bumper year and operational gearing, then if this is sold and used to pay down debt then I think it could be quite dilutive in the short term until or unless they reinvest the proceeds more productively.

Aside from that on the back of the detail in the statement and the previously announced effects of the living wage this year they also said that they expected this year to be flat or broadly steady compared to 2015 as they described it. Current forecasts for the coming year already factored in a small fall in earnings and further 4% growth in the dividend which seems reasonable given good (2.8x) level of cover and their progressive policy which has grown the dividend steadily over the last 10 years+. Given they beat this years numbers I guess it is open to question whether we could therefore see some upgrades for this year, but if we take the current forecasts of 62.6p of earnings and a 25.4p dividend then at this mornings largely unchanged price of around 400p puts it on a no growth rating of 6.4x with a 6.4% yield.

Summary & Conclusion
A decent set of numbers and a reasonably realistic outlook statement from Interserve with nothing in it which seems to justify the recent dramatic sell off and de-rating of the shares. Indeed on a yield of 6.4% and assuming they can continue to grow the dividend at the historic rate of 4 to 5% this would suggest potential for double digit returns in the medium term, even without a re-rating, which seems to be a decent equity risk premium to me.

However, the only slight caveat for me, introduced by today's announcement, is the suggestion that they are doing a strategic review of the Equipment Services business. If this does lead to a disposal then that looks to me that it could be dilutive but I guess we should await the outcome of the review and see what happens in the longer term as a result, before getting too concerned about it in the short term. So given the outlook, probably not enough here to get the market excited short term, but the rating and longer term prospects mean it looks like a hold for me for income and growth in the medium term.