International support services and construction group Interserve has seen profits fall, the final dividend suspended and a “disappointing in its UK construction business, according to the annual results for the year ended 31 December 2016 published this morning.

Group revenues were constant at £3.2 billion, with growth from international businesses, offset by a modest decline in UK Support Services, due to delays in Government procurement around the 2015 General Election and Brexit uncertainties.

Strong performances from Equipment Services and Construction International and resilience in Support Services UK, were offset by weak performance from Construction UK.

Interserve said it has a strong future workload of £7.6 billion, with particularly strong workload growth in Construction International

Chairman Glyn Barker described 2016 as a challenging year for Interserve, commenting:

“We had solid results in our core businesses, with a strong year for equipment services, continued growth in International Construction and further good progress in frontline and support services, backed by an improved cash performance.”

“This performance was overshadowed by the serious challenges posed by the legacy of our participation in the Energy from Waste (EfW) business and the escalation in the costs of exiting that sector. These contracts have been beset with contractual problems, failures in our supply chain and complex technical issues.”

Following a detailed review of the exited business, including the potential impact of the termination on the Glasgow EfW contract and the insolvency of a major subcontractors, Interserve announced last week that it was necessary to increase the exceptional loss by a further £90 million – it now stands at £160 million.

Glyn Barker added that it would be some time before the group had full visibility of the actual final cost of resolution and that Interserve had an excellent team of legal and technical experts in place who will do all that is “necessary to protect our position and resolutely pursue our rights in the disputed areas.”

“We have taken the difficult decision to suspend the dividend temporarily”

Interserve has implemented a greater focus on cash flow during the year which has become “all the more important as the impact of the exited business has been increasingly onerous.”

While liquidity available to the group is adequate, the Board has put new banking facilities in place that expand and extend debt capacity.  Glyn Barker continued:

“While liquidity available to the group is adequate, the Board has a medium term objective to reduce our overall indebtedness and enhance liquidity levels further whilst continuing to invest in our core businesses. We have therefore taken the difficult decision to suspend the dividend temporarily. I regret this has become necessary, but we took this decision only after examining scrupulously all alternatives.”

In recognition of the exceptional, short term increased cash demands of the EfW exit the group has  secured additional bank facilities of £133 million, which raises total available facilities and US Private Placement Notes to £640 million.

UK Construction division – disappointing performance and a net loss

Interserve’s UK Construction business, excluding the Exited businesses, delivered a disappointing performance. The group attributed this to the continuation of a long period of challenging market conditions, coupled with pockets of underperformance in operational delivery in a number of contracts. These had off-set strong performances in most of the regional businesses, resulting in a net loss result for the division.

 The results, allied to the difficulties around the Exited business, have led to a series of senior management, procedural and other organisational changes across the division, which are set continue in 2017. Strategically, Interserve has narrowed the focus for work winning to core sectors and activities and have refined the risk profile of work taken on.

Future workload fell 12 per cent to £1.2 billion, wich ther group said reflects the increased selectivity in work winning. The substantial majority of work is focused on low-risk projects with an average value of less than £10 million, constructing a range of buildings and infrastructure often under framework agreements with public-sector customers and utility companies.

Strong presence in utilities sector

Interserve’s strong presence in the utilities sector is the bright light in the division – this was reinforced with new contract wins worth more than £200 million. These included the Birmingham Resilience 'Treated Water' contract for Severn Trent (in joint venture with Kier), and, (in joint venture with Doosan Enpure), a contract with Northumbrian Water to upgrade the Horsley water treatment works in the Tyne Valley. The group also selected by South West Water to deliver a new water-treatment plant, which will serve Plymouth and the surrounding area.

Interserve said that in the near term the focus would be on consolidation and on re-establishing the quality of earnings and the appropriate risk:reward profile in continuing UK construction operations, commenting:

“In more stable market conditions overall, we believe there is sufficient demand to enable us to achieve this objective at broadly current revenues.”

Outgoing Chief Executive Adrian Ringrose, who is due to step down from the Board and leave the company once a successor has been appointed, commented:

"2016 was a mixed year for the Group. We delivered a strong cash performance and the majority of our businesses performed well despite political and economic uncertainties, together with the impact of the National Living Wage in the UK. However, the performance of our UK Construction business was disappointing, and we are focussing our efforts on improving and re-shaping this business.”

“Managing the challenges of exiting from the Energy from Waste sector remains a significant priority. As previously announced, we have increased the exceptional provision for exiting this market and the associated contracts to £160 million. We expect to complete substantially all of the construction and commissioning of the projects during 2017, although our contractual obligations in respect of warranties, and the resolution of claims will continue for a period thereafter.”

Despite the increased uncertainty following the UK's EU referendum, Interserve said the outlook for the current year remained positive. “This, together with our strong market positions and healthy future workload, underpins the Board's confidence in our medium term prospects."