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Interserve a bargain

Investors can gain a healthy dividend and take advantage of good growth prospects with Interserve.
April 1, 2015

Acquisitions and contract wins are driving growth at support services and construction group Interserve (IRV) and prospects are underpinned by last year's 26 per cent surge in its order book to record levels. However, with the upcoming UK election causing some temporary uncertainty, the shares are trading at just nine times current-year earnings forecasts and are expected to yield 4.3 per cent, despite expectations of healthy growth. That looks too cheap.

IC TIP: Buy at 580p
Tip style
Value
Risk rating
Medium
Timescale
Long Term
Bull points
  • Strong order book
  • Strong dividend yield
  • Diversified support services business
  • Bargain rating
Bear points
  • Slow international construction recovery
  • UK election uncertainty

Interserve spent the past year beefing up its support services operations with the acquisition of Initial Facilities a year ago, as well as the Employment and Skills Group. The purchase of Rentokil's Initial Facilities, which provides facility services in the UK, Ireland and Spain, helped take the support services division's contribution to total group sales to 59 per cent and its contribution to profits to 63 per cent. The deal has boosted Interserve's exposure to the private sector as well as increasing the range of services it can offer, which is helping it win bigger contracts, such as a recent £35m contract extension with B&Q.

 

 

Helped by the acquisitions, operating profits at the UK support services business grew by almost half to £81.4m in 2014 and revenue in the UK is now split evenly between the public and private sectors. Given the sway politics has on outsourcing budgets, as the forthcoming election is reminding the market, increasing private-sector exposure seems a shrewd move. Public sector provision remains important, though. Interserve's healthcare business, which provides at-home care for high-need patients, is benefiting from increased investment, and a £622m contract in the justice sector got up and running in February.

Interserve's international support services presence is less than one-tenth the size of its domestic operations, but is growing rapidly. A mix of contract wins from new and existing clients delivered organic growth of more than a third in 2014, while, including acquisitions, profits were up by four-fifths to £7.4m. Its acquisition of the Employment and Skills Group also gives Interserve the opportunity to extend its front-line services in Saudi Arabia as the business operates three further-education colleges in the country.

Increased competition has put profits under pressure at the group's construction business, which accounted for 36 per cent of sales last year and 19 per cent of profit. But UK operating profits - which account for three-fifths of overall construction profits - were still up by 5 per cent last year to £15.4m and volume growth is expected in 2015. Prospects are also looking up for Interserve's Middle-East-centric international business following a decline in operating profits of almost a fifth last year. This is reflected in growth of more than a third in the international order book in 2014.

The high-margin equipment services division, which accounts for just 6 per cent of revenue but 19 per cent of profit, is going from strength to strength, benefiting from strong demand in the Middle East in particular. Demand here often proves a forerunner to improved construction markets. The division hires and sells specialist equipment for infrastructure and building projects globally. Operating profits grew by a third last year to £26.6m, while margins were also boosted by 170 basis points to 13.6 per cent.

INTERSERVE (IRV)

ORD PRICE:580pMARKET VALUE:£834m
TOUCH:579-580p12-MONTH HIGH:752pLOW: 488p
FORWARD DIVIDEND YIELD:4.7%FORWARD PE RATIO:8
NET ASSET VALUE:325p*NET DEBT:56%

Year to 31 DecTurnover (£bn)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
20122.17745.620.5
20132.28147.621.5
20142.910658.823.0
2015**3.011863.125.0
2016**3.212869.027.0
% change+7+8+9+8

Normal market size: 2,000

Matched bargain trading

Beta: 0.7

*Includes intangible assets of £524.5m, or 364p a share

**Numis forecasts, adjusted PTP and EPS figures