12 Jan 2010 07:00
12 January 2010 TRADING UPDATE OVER £350m OF CONTRACT WINS
Interserve Plc, the services, maintenance and building group, today provides an update on trading in advance of its annual results announcement on 10 March 2010, including details of new contract wins totalling over £350 million.
Trading Performance
Overall the Group has performed well, in line with the Board's expectations and backed by excellent cash generation. Strong performances from the Group's international construction and equipment services businesses, combined with stability in the UK public and utilities sectors, have offset challenging market conditions in the UK private sector. The Group continues to take action to reduce its cost base where necessary and retains its focus on cash generation in what is expected to remain a difficult economic environment.
Contract Wins
Since the November interim management statement Interserve has won a number of contracts across a range of sectors with a combined value of over £350 million, including awards in both the UK and Middle East:
* Shell: a five-year £30 million industrial services contract at the Qatar Shell Gas-To-Liquids facility at Ras Laffan Industrial City; * Education City, Qatar: a £40 million two-year contract to design and construct two energy centres that service the new Education City being developed on the outskirts of Doha; * Defence Estates, Ministry of Defence: a two-year extension to our contract to deliver facilities management services in the Falklands Islands and Ascension Island, worth c. £24 million; * Ministry of Justice: a £70 million contract to design and construct a young offenders institution at Glen Parva, Leicestershire; * Thames Water: finalisation of a £60 million contract to construct new facilities and upgrade existing works at their Riverside sludge digestion plant; * United Utilities: appointed preferred bidder as part of the KMI Plus joint venture on a major £70 million project in Preston to design and construct new storm water tunnels; * Local Authority Framework Agreements: two multi-year construction framework agreements with North Yorkshire County Council and the East Midlands Property Alliance respectively, with a combined value to Interserve of £30 million; * Oman: two contracts for the design and construction of buildings for Al Hosn Investments, with a combined value of c. £20 million. * ProCure21: an £8 million contract with Airedale NHS Trust to replace the electrical infrastructure and undertake associated structural improvements at Airedale General Hospital in Keighley, West Yorkshire; and
Facilities Management
While benefitting from growth in revenues from new contracts, the division's performance in 2009 has been adversely impacted by challenging market conditions in the private sector, significant investment in operating costs and infrastructure in order to support the start-up and mobilisation of new public sector contracts. Cost-reduction programmes are being implemented to mitigate this impact. The division reached a key milestone on 1 December 2009 when it commenced its largest private sector contract to date, the major outsourcing contract with HSBC.
Specialist Services
Market conditions continue to be challenging across the division. Following restructuring action taken, Specialist Services has returned to profitability during the second half of 2009. However, given the uncertain demand outlook in the markets served by this division the Board has determined that it is appropriate to consider the carrying value of goodwill associated with these activities. As such, the 2009 Income Statement is expected to include a non-cash exceptional impairment charge of c. £30 million.
Project Services
Benefitting from the strength of our local partnerships and their geographic and sectoral diversity, the Middle East operations have delivered another strong set of results and continue to win work across the region, despite the tough trading environment in Dubai.
In the UK the strategy of focusing on long-term work streams emanating from framework agreements awarded in the public and utilities sectors has led to a good performance, with both revenue and profits ahead of prior year. The business has positioned itself well for anticipated near-term pressure on public sector capital spending by building a future workload of c. £1.2 billion across its chosen target markets and retaining tight control of overheads.
Equipment Services
The Middle East has been the major driver behind record divisional results, buoyed by the impact of several major projects in the UAE, with Australasia also an important contributor. Elsewhere market conditions remain tough, mitigated by the cost reduction actions already implemented.
PFI Investments
In November 2009 the Group was pleased to announce the transfer of its interests in a number of PFI investments to the Interserve Pension Scheme through an innovative transaction to realise value from the substantial long-term cash flow streams inherent within the PFI portfolio. The valuation of £61.5 million represented an effective discount rate of 6.5 per cent and generated a c. £35 million exceptional profit.
During 2009 the Group reached financial close on four new PFI contracts. With an encouraging pipeline of opportunities across a range of sectors the Group will continue to leverage its PFI expertise to generate value for shareholders.
Financial Position
Early action taken to reduce capital expenditure, together with value realisation from the PFI portfolio and positive working capital movements, have combined to result in excellent cash generation through the year and an improvement in the Group's net debt position since the half year. The Group retains committed facilities of £250 million, expiring in or after 2011.
During the second half of 2009 Interserve achieved much in improving the funding position and limiting the potential future volatility of the Interserve Pension Scheme. A number of actions have been completed in the period:
* The closure of the defined benefit scheme to future accrual for all non-passport members from the end of 2009; * The implementation of a new investment strategy, designed to reduce investment risk through greater asset diversification and matching of inflation and interest volatility with scheme liabilities; * The transfer of 13 PFI investments from the Group to the scheme, thereby reducing the funding shortfall by £61.5 million, as outlined above.
The final stage of the triennial process, including agreement of a revised schedule of company contributions into the scheme, is on track to be completed in the coming weeks.
Outlook
Actions taken during the year have enhanced the ability of the Group to manage its way successfully through difficult market conditions. These have included:
* Delivering strong conversion of profits into cash to reduce further net debt; * Addressing the pension scheme volatility and funding shortfall through the closure of the scheme and the implementation of an innovative agreement that crystallises value from the Group's balance sheet; * Winning significant new contracts with a whole-life value in excess of £1 billion, in both the private and public sectors in the UK and Middle East; and * Taking further action to adjust the cost base to the challenging market environment.
The work-winning in the period has contributed to a healthy future workload that contains £1.7 billion1 of work for 2010. With the strong revenue visibility afforded by this workload, a balanced business mix, and the ability to explore and develop new markets the Board continues to believe that the Group is well placed to deliver resilient near-term performance and sustain long-term growth.
An electronic copy of this Trading Update will be available to download from the Company's website, www.interserve.com.
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For further information please contact:
Adrian Ringrose, Chief Executive 0118 932 0123 Tim Jones, Group Finance Director 0118 932 0123 Matt Jones, Head of Investor Relations 0118 960 2280 Elizabeth Morley / Tom Roberts 020 7379 5151 Maitland
About Interserve
Interserve's vision is to be the Trusted Partner of all our stakeholders. We are a services, maintenance and building group operating in the public and private sectors in the UK and internationally. We offer advice, design, construction and facilities management services for society's infrastructure and provide a range of plant and equipment in specialist fields. Interserve is based in the UK and is a FTSE 250 company. It has revenue of £1.8 billion and a workforce of 50,000 people worldwide. Website: www.interserve.com.
1 Including our share of the Middle East associates future workload
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