Government reassures over supplier Interserve

Image source, Getty Images
Image caption,
Interserve runs employment workshops at HMP Berwyn in Wales

The government has said it does not believe any of its major suppliers are in a similar position to Carillion.

It commented after shares in the construction and services firm Interserve fell amid reports that its financial health was under special Cabinet Office scrutiny.

The Cabinet Office said it monitored all its "strategic suppliers", and was in regular talks about their finances.

Interserve said it was keeping officials informed.

The company, which employs 80,000 people worldwide, issued a profits warning in September saying its profits were likely to halve, in part because of big losses in its energy-from-waste business.

This was followed by a second profits warning in October.

It said it expected net debt for 2017 to be about £513m, in part because of the problems in the energy-from-waste business, but also a "normalisation of trading terms with our supply chain and exceptional costs".

However, it forecast that debt would peak in the first half of 2018.

Interserve is involved in a three-year restructuring programme launched by new management in October aimed at improving efficiency, its procurement process and simplifying the business.

Transformation plan

On Wednesday, the Financial Times reported that the Cabinet Office was monitoring Interserve.

In response, Interserve said: "Last week we announced that we expect our 2017 performance to be in-line with expectations outlined in October and that our transformation plan is expected to deliver £40m-£50m benefit by 2020."

It said it expected its 2018 operating profit to be "ahead of current market expectations and we continue to have constructive discussions with lenders over longer-term funding".

"We are keeping the Cabinet Office closely appraised of our progress as would be expected," it added.

Like Carillion, Interserve's business involves construction, as well as cleaning, healthcare probation and healthcare services.

The Cabinet Office said: "We monitor the financial health of all of our strategic suppliers, including Interserve.

"We are in regular discussions with all these companies regarding their financial position. We do not believe that any of our strategic suppliers are in a comparable position to Carillion."

'Thin margins'

Neil Wilson, senior market analyst at ETX Capital, said Interserve had had its problems ,"but it's no Carillion".

He said last week's trading update "showed improvement", but added that Wednesday's reports would do "no good for sentiment, given there may be some twitchiness among investors in the sector following Carillion's collapse".

"Comparisons with Carillion are all too easy to make, of course - a diverse business operating on thin margins. It has faced pressure from employment and contract mobilisation costs and margin deterioration from a cost base which has not been flexible enough," added Mr Wilson.

However, he added: "The arithmetic doesn't look anything like as bad as Carillion."

He pointed out that Interserve had been winning contracts in recent months, including a £140m contract with the BBC to continue providing facilities services and a £227m contract from the Department for Work and Pensions.

Shares in Interserve fell sharply at the start of trading in London, but have subsequently rebounded to stand about 1.5% lower.