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Interserve mostly strong (IRV)

Created:
14 July 2008
Written by:
Algy Hall

Maintenance and building group Interserve has said first-half trading has met expectations of strong growth but, despite the generally defensive characteristics of its end markets, there are some signs that economic weakness is being felt.

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Indeed, the UK projects and facilities business has seen weakness in a small number of its markets. However, overall, the division’s focus on the public sector and infrastructure projects has helped to sustain growth. The group is also being buoyed by its exposure to strong markets in the Middle East, where it generates over a third of its revenues, and in Australia. The mining and infrastructure sectors in these regions are booming and there are rich pickings for companies such as Interserve that have established roots in the market.

The group's private finance initiative (PFI) portfolio has also been bolstered during the first half with two new contracts reaching financial close in the period. The group now has 21 fully operational contracts and investment commitments in 26 projects. Interserve is confident about the outlook for the business, although there are some fears about how much better things can get in the Middle East before that market passes its peak.

ABN AMRO

Add. The project services and equipment services businesses are benefiting from a strong Middle Eastern performance, with the Australian mining boom particularly helping the latter business. We reiterate our forecast for pre-tax profits of £80m for 2008. However, there is no upgrade signalled - as some had hoped - as the group has flagged up elements of what we estimate to be an 18 per cent profit exposure to the private sector. The group generates £15m in annual revenues from its retail fit out business and has a front end equipment business that is seeing some weakness. There may be an increasing medium-to-long-term bubble worry for the Middle East, too.

INVESTEC SECURITIES

Hold. Interserve’s trading update has highlighted that the first half has been strong, showing healthy growth over the past year and in line with expectations. We are not changing our full-year EPS forecast of 42.1p (2007: 39.2p), but have reduced our target price from 468p to 380p in line with the de-rating of comparative stocks. We recommend switching into MITIE which has a much higher support services element to its business and, in our view, a more attractive valuation.

IC VIEW

GoodValue

While Interserve is relatively well shielded from the travails of the domestic economy, market ructions have hit the share price. Still, at 445p, the shares trade on a relatively undemanding 11 times Investec’s forecast earnings and look long-term good value.

Last IC view: Good value, 448p, 12 March 2008.

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