It was once a sector beloved of investors.
From the late 1990s onwards, as both central and local government sought to outsource more and more of their activities to private sector contractors, support services was seen as a sector that could do no wrong and that offered huge scope for growth.
Companies such as Capita, Serco, Mitie, Carillion and G4S all became stock market darlings. All eventually came a cropper in one way or another.
Today saw another horror story from the sector as Interserve saw its share price more than halve following a profits warning. The company, which was valued by the market at £1.1bn a little over three years ago, is now worth barely one-tenth of that.
You may not be that familiar with Interserve. However, with more than 80,000 employees worldwide, this is a business that touches millions of people’s lives on a daily basis.
Its army of more than 15,000 Mrs Mopps cleans thousands of shops, trains, offices and stations around the world on behalf of 500 clients. Its people clean windows at 9,000 sites across the UK and Ireland.
It builds, designs and maintains all manner of commercial premises, including schools and colleges.
It serves more than 100,000 school meals every day.
It puts up the temporary seating for the Royal Edinburgh Military Tattoo.
It built the A38 Dobwalls bypass in Cornwall, even going to the trouble of including special features to help preserve the local bat population.
And it runs rehabilitation programmes for people leaving prison.
A broad spread of businesses, you might think, that would surely prevent it from suffering from too many mishaps.
Yet history has proved time and again that just because a company is good at one activity, it does not follow that it will be good at another, however closely related it may appear to be.
Sure enough, seeking to expand that spread of activities has conspired against Interserve, which was founded originally as a dredging contractor in 1884.
An expansion into building energy-from-waste plants, an area in which it was not previously in, proved more expensive than expected. The company has already said it will pull out of the sector.
Today, though, Interserve warned that the “timing and complexities” of getting out of the business were likely to “significantly exceed” the £160m that it has currently set aside to do so.
To put the size of that financial hit into context, the company’s operating profits last year were just £124m.
That is not the only area where Interserve is finding life hard.
Image: George Osborne’s imposition of a National Living Wage added £15m to Interserve’s annual costs
Former Chancellor George Osborne’s imposition of a National Living Wage two summers ago at a stroke added £15m to its annual costs – putting margins under further pressure in a sector where they were already comparatively low.
According to Russ Mould, investment director at the stockbroker AJ Bell, the warning signs were there for those who cared to look in the company’s half-year results statement last month.
He adds: “The first red flag was the latest batch of supposedly ‘exceptional’ items, whose consistent presence in the profit and loss account suggests they are anything but that. The second red flag was the creaky balance sheet. The third was the use of impenetrable language.”
It is perfectly possible that today’s warning, which also alerted investors to disappointing trading in other divisions, was what is known in the City as a ‘kitchen-sink’ job – in other words, a statement where a company throws in every conceivable piece of bad news that it can in order to paint as bleak a picture as possible to investors.
This is a common tactic when a new boss, wishing to depress expectations, has arrived and, sure enough, Interserve welcomed – if that is the right word – new chief executive Debbie White at the start of the month.
Yet there is reason to suppose things may be just as bad as they look.
The company’s net debt, a legacy of all that expansion, is forecast by broker Peel Hunt to be at £435m by the end of the financial year.
Getting that down will be one of Ms White’s immediate priorities and, as that debt is supported by just £100m or so worth of equity, it seems odds-on that Interserve will be asking shareholders for more money imminently.
Just as soon as it has got around to hiring a new finance director, that is.
Source: Sky News