Interserve Share News (IRV)

(Sharecast News) - Interserve, the construction and services company, said net debt would swell more than expected this year but maintained targets for cost-cutting and "significant" profit growth.In an update covering the first nine months of the year, the company said although it had completed all the construction of all projects in the troublesome energy-from-waste sector, certain project delays had led to financial penalties that would offset some of the expected cash inflow from milestone payments. The inflow in the second half is now expected to be around £15m, down from £32m.Coupled with an increase in receivables from some Middle Easter projects, this will mean year-end net debt is now expected to be £625-650m, worse than the £575-600m guidance given at the half-year results.Interserve, which has seen its shares fall by more than two thirds since the collapse of fellow government contractor Carillion in January, said trading was otherwise in-line with forecasts, running on track to deliver "a significant operating profit improvement" this year, with £15m of cost savings as part of chief executive Debbie White's Fit For Growth programme and progress made in each division in the face of some challenging markets.White, who took over in September last year amid a series of profit warnings, said that after April's refinancing, the "robust" trading performance this year and some sizeable contract wins, she planned to announce a deleveraging plan "early in 2019"."Interserve has significant opportunities as a best-in-class partner to the public and private sector, and we are working with all stakeholders to put in place the right standards, services, governance and financing to deliver a stronger future for Interserve's customers and our 74,000 people."Shares in the FTSE Small Cap-listed group fell another 6% to 32.87p on Friday.White and her team are clearly doing their best to steady the ship at Interserve, said Russ Mould, investment director at AJ Bell, but the admission that net debt will end the year higher than expected was not reassuring for shareholders and potential investors.The additional EfW penalties highlight the challenges which continue to face the company and the support services sector overall, Mould said, pointing to the complex company structures and limited operational synergy between different activities and geographic operations within the groups; the reliance on big, complex contracts that can become very expensive if something goes wrong; very thin operating margins of 2.7% in the UK and 2.1% overseas for support services and 1.4% in the UK and 3.1% overseas for construction in the first half; plus the balance sheets that are stretched after a long period of growth. "These factors explain why Interserve's shares trade at their lowest level since the mid-1980s. Debbie White and her team are clearly aware of them and this year's refinancing bought the company some time while the cost-cutting plan kicks in and asset sales are used to start reducing the crushing debt burden."But some shareholders - and potential investors - may be wondering why a new plan designed to reduce debt is only being unveiled in 2019, when the share price slide suggests the company's situation remains acute."And the lower the share price goes, the more shares Interserve will have to issue, and the more dilution shareholders may suffer, should management decide that an equity raising is required to buffer the company's finances."