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Interserve energy-from-waste costs inflate

Shares in the outsourcer have tumbled after Pennon revealed a jump in costs related to the energy from waste business
March 27, 2018

Less than a week after outsourcer Interserve (IRV) announced it had secured new financing, hopefully saving it from a Carillion-style collapse, the company has been hit by more bad news. Water utility Pennon (PNN) announced in a trading update the overall expenditure required for its Glasgow energy recovery facility – where Interserve was previously a contractor – would be £95m higher than the original £155m target. Pennon is entitled to recover incremental costs from the principal contractor, meaning Interserve is on the hook once again. 

IC TIP: Sell at 86p

Investors had feared Interserve might find itself overwhelmed by its debts after management warned in October that there was a realistic prospect it would fail to meet the net debt to cash profits requirement in its financial covenants at the end of 2017. It has since deferred the test date until April this year.

As might be expected, the new borrowing has increased costs and the group now expects to pay around £56m in total interest expenses in 2018. The group will also issue warrants to the providers of the new cash and bonding facilities, allowing them to buy shares at 10p per share. This would leave the warrant holders with a fifth of the post-issue share capital if the options were exercised.