Interserve warns it could breach its banking covenants after its latest profit warning

 
Courtney Goldsmith
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Interserve's shares have been hit yet again (Source: Getty)

Shares in Interserve have tumbled more than 30 per cent after the company warned it could breach its banking covenants as operating profit in the second half was set to be around 50 per cent lower than previously expected.

Shares dropped 32.5 per cent to 60.75p in morning trading.

Trading slowed in the third quarter, Interserve said, with a downturn in its UK support services arm caused by employment cost pressures and margin deterioration, which was "driven by a cost base which has not been flexible enough".

Operating profit in UK construction also deteriorated due to challenging market conditions and cost pressures as well as operational delivery issues.

The company added it had seen a "slippage" in the completion date for some of its troublesome waste contracts. In addition to the £160m provided in 2016, an additional £35m provision is expected to be required and "significant uncertainty" remains on the timing of commissioning.

"Taking all of these factors into account, we now believe there is a realistic prospect that we will not meet the net debt to Ebitda [earnings before interest, tax, depreciation and amortisation] test contained in our financial covenants for 31 December 2017," Interserve said.

Shares in the company were also hit earlier this week after it admitted it was in talks with its lenders.

"We have engaged a financial adviser to assist us in these discussions, as well as looking at options to maximise the short and medium term cash generation from the business," Interserve added today.

In September, around half of Interserve's market value was wiped away after it warned trading in July and August had been "disappointing". At the start of the year, shares were trading at around 340p.

The company will launch a group-wide performance improvement plan and a contract review across its support services and construction businesses.

Debbie White, chief executive, said:

Despite our challenges, Interserve has a strong client base and many strengths as an organisation and I believe there is considerable potential for business improvement across the company.

My team will focus on improving our margin performance in UK support services and ensuring good contract selection in UK construction, while reducing our cost base across the company.

Read more: Interserve share price drops as it confirms talks with lenders

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