Interserve looks cheap but it's not a deep value play.
I'm looking today at Interserve (LSE: IRV) which continues my post-resurrection series of yesbut value plays. By this I mean that they exhibit some classic value features but may be somewhat short in others, a bit like choosing a partner when you can never find that ideal individual who possesses all the characteristics you really want. There's always something or other lacking or which irritates you. Most of the shares I have reviewed in this series have been medium to large cap companies.
Here's the usual stuff:
| Share price | 203p |
| 52 week high/low | 264p/158p |
| Market cap | £254m |
| Eps 31/12/08 | 46.7p |
| Forecast eps 31/12/09 | 43.3p |
| Forecast eps 31/12/10 | 42.3p |
| Forecast P/E 09 | 4.7 |
| Forecast P/E 10 | 4.8 |
| Dividend 31/12/08 | 17.0p |
| Forecast dividend 31/12/09 | 17.4p |
| Forecast dividend 31/12/10 | 17.8p |
| Forecast yield 09 | 8.6% |
| Forecast yield 10 | 8.8% |
| Tangible assets 30/06/09 | negative |
| Net debt 30/06/09 | £83.3m |
| Directors own | under 1% |
| Other majors own | 23% |
The clear value weaknesses are the negative tangible assets and the net debt.
The debt is not huge in relation to market cap at around 33%, but in line with my "all debt stinks" viewpoint it is not a positive attribute. There is some good news on this point because in its interim management statement published on 16 November, the company stated that strong cash generation had led to a reduction in net debt since 30 June though no figure is given.
Why the low rating?
The clear value strengths are the ultra low P/E and high yield. When you see very high forecast yields like this of between 8-9% the question you gotta ask yourself is whether the dividends are sustainable. And when you see such low P/Es, you have to ask why the market is giving it such a butt-kicking rating.
The dividends certainly do look feasible. If the figures materialise, eps is covering them at well over twice for both the forecast years of 2009 and 2010, as it did for actual 2008, and the talk of cash generation supports this too.
The very low P/E is harder to explain. But note that what the value player seeks is actually no explanation, which I appreciate may sound odd to some. We don't want plausible reasons why a P/E is unreasonably low, it is sufficient justification in itself that it is so. That's the whole point of low P/E, the belief that the market has got it wrong. If there is an acceptable explanation then the share probably deserves its low rating and consequently it aint no value play on P/E grounds.
So is there with Interserve some reason that justifies a P/E of under 5? What nasties can we find to either justify it or conclude that it is not justified? Well, eps is set to fall slightly over the next couple of years but I don't think that this fall is anywhere near drastic enough to warrant this rating. Another bad point is that they were fined recently the relatively substantial sum of £11.6m following an OFT investigation into the construction sector which leaves a bad smell over their activities.
In my view these don't explain the low P/E because against the downside items above, the company reported in the recent management statement that it has since June continued to win significant new contracts and that it is "…well placed to deliver robust near-term performance and future growth."
So taking these factors together, I can't see any reasonable explanation of why the P/E should be under 5 so I think it's too cheap on this measure. And I think it is too cheap on yield as well. But it's not one for deep value players because of the negative tangible assets and presence of debt.
By the way, last, and definitely least, the company is engaged in support services which doesn't meant that it makes ladies' underwear but is involved in facilities management and construction for a wide range of customers.
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