Interserve offers MidEast delights

As the government moves on from its numerous spending reviews, conditions are slowly improving for construction and building maintenance groups such as Interserve. With its third-quarter trading update last month, the group announced plenty of new work - including a contract with the Ministry of Defence worth up to £420m, along with several education contracts for building schools, totalling £37m.

In fact, Interserve has won contracts worth a total of £600m since June - which has allowed the group to keep its workload flat at £5.3bn. What's more, revenue visibility into next year is also stable at around £1.4bn. That's not at all bad in today's uncertain economic times. Still, the sluggish pace of government spending remains a concern and a serious slowdown at home is a worry - a chunky 52 per cent of operating profit currently comes from from the UK. That's possibly why management sounds keen to focus on the 32 per cent of operating profits that are derived from the Middle East and Africa and, in particular, the group's prospects in Qatar. This is an especially fast growing economy which boasts some of the world's largest gas reserves and where there's plenty of need for infrastructure work. It's risky, though: witness this year's unrest in Bahrain, and the collapse in construction activity in Dubai during 2009.

Canaccord Genuity says...

Buy. The primary drivers for future growth will be the UK public sector' growing focus on outsourcing to deliver efficiency gains, together with expanding demand for infrastructure investment in the world's fastest-growing economies - particularly Qatar, looking out to 2013-14 and beyond. Trading on seven times our 2011 full-year earnings estimate, we believe the shares remain cheap given the material reassurance that our recent review of Interserve's Qatari operations has provided. We reiterate our buy recommendation and a sum-of-the-parts based price target of 397p.

Collins Stewart says...

Buy. Management has articulated an ambition to double earnings, organically, between 2010 and 2015 - which is a materially stronger outlook than most of the companies we cover. Consensus forecasts suggest little EPS growth over the next three years, so there's scope for material earnings upgrades - we currently expect adjusted pre-tax profit of £71.9m for 2011, giving EPS of 47.6p. We are also raising our price target to 450p, from 405p - which is based on consensus earnings forecasts and our sum-of-the parts valuation of 460p. The shares are attractive and we reiterate our buy stance.