September 14, 2017 / 7:06 AM / 9 months ago

Interserve shares slump as firm warns on trading in Britain

(Reuters) - Shares in Britain’s Interserve (IRV.L) crashed more than 50 percent after it warned of lower annual earnings on Thursday, showing the challenge its new boss faces at a business hit by the cost of winding up loss making waste-to-energy contracts.

The construction and services company said “complexities of completion” meant final costs associated with its exit from the waste-to-energy business would exceed a previous 160 million pound provision.

Interserve decided to exit the business in August 2016, after struggling with cost overruns and delays in a Glasgow contract. The company then in February more than doubled its expected charge after a review.

Many companies trying to generate energy from waste have been forced to make expensive design changes, escalating costs.

Interserve also said that trading in UK construction and support services, two parts of the business that account for 94 percent of the firm’s revenue, had been worse than expected over July and August.

It had previously guided towards modest 2017 volumes growth in UK support services.

“It’s not a business model crisis, it’s a company crisis,” said an analyst, who declined to be named.

“You can ask how strong management controls are if a company guides towards certain numbers and only realises just now that actually things aren’t going well. That’s not very encouraging.”

New Chief Executive Debbie White, who joined this month from Sodexo (EXHO.PA), will have to work to control revenue streams and more importantly curb cost escalations to restore margins, analysts say.

The company has already suspended dividends to preserve cash, after swinging to a pre-tax loss in 2016.

Interserve, Mitie (MTO.L), Capita (CPI.L) and Carillion (CLLN.L) have been hit over the past year by rising labour costs and as unplanned changes have escalated costs on past contracts.

A failure by clients to renew or commission new contracts as they grapple with Brexit uncertainty has compounded the problem, prompting warnings from Interserve’s peers.

“We see no immediate read through to peers but are mindful of Interserve’s response to securing new work given the recent trading and balance sheet issues... The shares may struggle for support near term,” Peel Hunt analyst Andrew Nussey wrote.

Interserve shares were down 50 percent at 76.25 pence at 1210 GMT. The company lost around 120 million pounds of its market value.

Reporting by Noor Zainab Hussain and Esha Vaish in Bengaluru; Editing by Edmund Blair/Keith Weir

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