Interserve – building the nation

Support services play Interserve is confident that it can profit from forthcoming government reforms to the public sector.

The fully listed group traces its origins to 1875, when it started life as a boat-building and repair outfit. Since the 1950s it has carried out a number of engineering and construction projects for clients in both the private and public sectors.

In 1996 it began work in Qatar, with the business increasingly focused on working in the Middle East. Locations at which it has carried out work include the London Eye, the Millennium Stadium in Cardiff and the construction of the world’s largest gas-to-liquid plant in Qatar.

In the past ten years it has also moved into the facilities management business, providing services such as cleaning, catering and security for customers including Boots, B&Q and Argos. Interserve recently unveiled an encouraging trading update ahead of its interim results in which it noted that it had won £1 billion worth of contracts in 2011, with recent wins including the Department for Transport, the Roads and Transport Authority of Dubai and a five-year deal with South East Water.

The group is led by Adrian Ringrose, a graduate of Liverpool University who started his career as a market researcher. He remarks that, while the company is operating at a time in which ‘the markets as a whole are very tough’, the business has ‘a lot of visibility and long-term contracts through our frameworking agreements’. He adds that, despite forthcoming cuts to the public sector, Interserve is well placed to benefit as it ‘adds value’ to the public sector clients that it works with.

He elaborates that the present government ‘does not see itself as a deliverer of services but as a procurer’, observing that it is currently working with the Department for Work and Pensions to try and get the long-term unemployed into work, with the company to be paid based on the number of people it gets off benefits. Ringrose opines that the company sees itself ‘as a partner for government that can provide them with our business management skills’.

Another area in which Interserve is interested is reform of the prison service, with Ringrose declaring that, ‘The government needs to reduce reoffending rates, and as the Ministry of Justice looks to make savings and open up the market, this is something that we would be interested in.’

Analysts at Liberum are forecasting pre-tax profits of £69.5 million on sales of £1.89 billion for the year to December 2011. In 2012 it sees profits climbing to £72.5 million on turnover of £1.92 billion. EPS of 41.7p and 42.8p are pencilled in for 2011 and 2012 respectively.

Dividends of 18.7p and 19.5p are forecast for 2011 and 2012, offering a yield of 5.5 per cent for 2011. Net debt of £54 million is forecast for the year-end.

A company with a diversified business model, Interserve has increasingly moved from being solely a construction business into providing services such as cleaning and security – a relatively resilient source of income that helps to bolster the forthcoming challenges in the UK public sector.

Furthermore, while the UK itself has experienced considerable strain during the past four years and Dubai has experienced a considerable drop in property values, Qatar has been able to escape much of the doom that has befallen its neighbours, with the country gearing up construction work over the next ten years in time for the 2022 World Cup.

Trading at a respectable rating, with a generous dividend yield and some strong growth prospects, we believe that shares in the company represent good value.