One to the hospital, one to the morgue

It is not a setting, not a statement; it is merely the observation of what we see happen. Yet the question becomes who is who? It is a setting of placing Interserve next to the Cardigan Integrated Care Centre that is where we see a situation evolving. And it would not be a London project that is in danger, would it?

Why the situation? It is the timing, even as everyone is still ‘working with’ and ‘LOCAL health board officials are confident that Cardigan’s new £24m health care centre will not be affected by the financial problems of outsourcing company Interserve‘, I am less certain that this will not have an almost deadly impact on the project. The article (at https://www.tivysideadvertiser.co.uk/news/17301424.interserves-problems-should-not-affect-cardigan-integrated-health-centre-project/) gives the people none of that and as far as I read the article, there is nothing there indicating the views I have, yet the setting is already staged to become worse, much more worse I might add. That is an easily given fact as the project is not due until the end of 2019.

You see, the article also gives us: “Interserve is responsible for delivering the project but there are fears over its future after it confirmed it was in rescue talks that would see retail shareholders virtually wiped out and creditors take control. Yet that is not the directive part in all of this, and the article (through no fault of it, or its writer) gives that part to the reader. You see, that part we get when we contemplate ‘Struggling Interserve may hand construction unit to lenders‘ (at https://news.sky.com/story/struggling-interserve-may-hand-construction-unit-to-lenders-11581667). the first question that rises, if there is such a debt, why would we see: “drawing up plans to hand its £250m building materials unit to its lenders as part of an ambitious plan to secure the company’s future“, which is a choice, yet when we see another article also giving us: “Outsourcing giant Interserve is preparing to spin off its lucrative building materials division in a bid to reduce its debts“, so why would a ‘lucrative’ part get sold off? Lucrative clearly implies the part that allows for a much quicker turnaround and in absence, that lucrative part used to keep the lowest bidding in place will also (optionally) drastically increase the cost of projects when it falls away and that is where the Cardigan health centre find itself optionally soon enough. We might think that ‘RMD Kwikform makes equipment used to build concrete structures‘ is no indication, yet this equipment is often merely leased per project and a new owner implies new (or additional) fees or another destination for that equipment, changing the entire setting of the project and experience, as well as history taught us that a board in trouble does not tend to care too much about their running projects.

Am I correct?

That remains to be seen, because there are several factors in this that are unknown, yet the setting that the project is a year away implies that there are plenty of stages uncompleted and they are therefor at risk. The fact that this news is 2 hours old means that there is no given setting, yet the large impacts will be seen in the next quarter and that is when the pennies drop for several projects, the question is on how the stage will be maintained.

The fact that Interserve stock has been reduced by 45% and when we consider that the Interserve board is close to a month away from revealing its plan, as well as the fact that this thunderstorm has been looming for over a month does not help matters.

From another source

The Financial times is giving us another setting here. With ‘UK government to continue awarding contracts to Interserve‘ (at https://www.ft.com/content/03f63e62-fd41-11e8-ac00-57a2a826423e), we saw that the government last week was setting the stage for Interserve to get some deals going as these projects mean money and money coming in is always a good stage to continue the work. So when I see “Government sources told the Financial Times that it does not view the company as another Carillion— the contractor that failed in January — and that it would consider Interserve for further tenders“, we should consider it as a partial truth, when you are down in a debt that soon will be pushed towards an approaching £1,000,000,000 (as I decided to round it towards the worst case scenario), we need to realise that something has gone terribly wrong, That amount approaches to the annual income of 32,000 construction workers, and their pensions, so there is another side to investigate soon enough (although we do acknowledge that the Interserve pension is high in the green).

Are we overreacting?

That remains to be seen. The fact that this large a debt is an issue on something this big needs to be scrutinised in several ways, not merely what is to come, but how come the debt is there in the first place. Improper pricing, inefficient project management, wrongful costs are all stages here that pushes additional costs through the roof and that is where it all hurts, and without proper vetting the pain remains and we will see additional projects operating at a loss. that part was given by Construction News in April this year when we got ‘Interserve suffers £244m loss for 2017‘, the quote “an “inefficient operating model” with high overheads had left the firm “exposed to weaknesses” in the support services and construction industries” by chairman Glyn Baker is clear enough, the wrongful setting and we see an amazing growth of losses and debt. the fact that we were given the implied “Interserve said the business will need a “significant de-leveraging event” to stay viable, which would likely be an asset sale, or raising further equity before December 2020“, which against ‘cut costs by £15m in 2018, and is on course to add £40m to £50m to operating profit by 2020‘ sounds almost like a joke, to with a debt over 800 million (conveniently rounded to a billion by me), we see the mention of “limiting the cost issue by 1.8%, whilst adding debt reduction by 5% in two years’ time is exactly the message in a stage how we should read it, A Joke!“, oh and that is all whilst in those 7 months £300 million was added to the debt, is anyone waking up yet?

In all this, Interserve has gone from bad to worse from 2015 onwards, all whilst some might expect that with Carillion out of play, options for Interserve should have opened up, no matter how bad the market was, one larger player was removed.

Round 2 is worse

The audience has been avoided getting exposed to certain parts of the business, we might not have realised it, yet that part is actually given the limelight by the Investors Chronicle (at https://www.investorschronicle.co.uk/alpha/2018/12/13/interserve-the-warning-signs-were-ignored/). You see, I saw certain parts a month ago, but for me, it was partial news as I never looked at Interserve before. So when we are given certain points, and I am merely leaving the ones that matter:

  • Low profit margins.
  • A reliance on acquisitions and cost cutting.
  • High debts both on and off its balance sheet.
  • A big pension fund deficit that needed large amounts of cash flow to reduce it.
  • A difficulty in converting operating profits into operating cash flow – a classic sign of poor profit quality.
  • The need to sell assets in order to maintain and grow dividend payments.

At what point did we not consider the massive danger Interserve was in? The events that I have been able to track go back to early 2016, The Financial Times in May 2016 and the Independent in August 2016 give us some of the goods, in addition there was Forbes in 2017: “Overruns lead to £70m charge for construction and services group“, as well as “The Reading company advised that a tight control of working capital across the rest of its business last year substantially offset the adverse cash impact over at EfW. Consequently net debt clocked in at between £270m and £280m as of the end of 2016“. It is the fact that we see a clear level of inaction (or bad management) that gives rise to the situation, the fact that these issues were clearly in place almost 2 years ago, gives rise that the government had a clear duty to intervene to some degree, that level might be up for debate, yet the ‘let’s leave it for now’ and the presentation (at https://www.interserve.com/docs/default-source/investors/financial-reports/presentation-results/2018/h12018-results-presentation.pdf) now give the consideration that there is every chance that shareholders might be seeking legal counsel. You see Interserve ‘presented’ the so called facts: ‘Fit for Growth initiatives delivering savings and creating a simpler, more effective Interserve‘, as well as “Overhead reduction and efficiency measures to deliver £15m savings in 2018“, gives serious contemplation that the shareholders were not properly informed of the dangerous place that they were in at that meeting in August 2018. In addition, slide 20 gives rise to another contemplation; the fact that two posts (Manufacturing and Regulated industries) are set to a marker size of £22 billion, 2 out of 7 mind you, and we see the losses incurred, we see additional worries on management and pricing. Even at a 1% margin, we should see £220 million in the plus for these two alone, the fact that the overall is set to minus £800 million, and a mere positive move of up to £50 million is a much larger debate and as such, one might argue that there is a lot more going on in the negative of Interserve that we might think.

Baskets of fruit

In opposition to my own view, I am in several ways comparing apples, pears and oranges and merely labelling the items as fruit, which in itself is not correct either. However, from my point of view, I see a tradesman dealing in 22 billion pieces of fruit and when left with a certain minus to this degree gives clear indication that the entire business model is wrong on a few levels giving additional worries on the earlier reported premise of ‘The need to sell assets in order to maintain and grow dividend payments‘, the conceded view that selling of your land year after year just to look good implies that the farm devaluates with every year and when we see that this has happened from 2016 onwards, the signs given should have been louder by many players and that (to the best of my knowledge) has not happened.

The Coroner is in the house

When we consider the elements, we can also give rise to what needs to happen. If Interserve continues on this path, there is every indication that we see sell off after sell of, with an optional class action against Interserve, implying that the damage increases, so those projects set for delivery in late 2019 and 2020 (A Wales health centre for example) will find themselves on the coroners slab whilst the media looks at the intestines coming to the conclusion that at present there was no way to save the patient, and when we see that, how will that affect the £25 million Merthyr’s Prince Charles Hospital in Merthyr Tydfil? These two are close to £ 50 million, something will have to give and where will the government spring in when they have to? Will they do that? This does not mean that this situation explodes to that degree, but the signs of patient Interserve are not that great at present. And should there be an interception to protect these two projects, does that imply that Interserve is ready to be shipped to the morgue?

That is the foundation of it, because the stage we see now implies that you can save one, but not both. The stage to the degree as I am seeing it should not allow for it in the first place; it does open up new options that as Interserve breaks down we will see new players come to life, perhaps one per construction project, yet that too has the danger of costs going overboard in a large way really fast, that is the nature of the beast, merely because the largest players implying to have the costing down to a margin is a mere 1%, smaller players can never do good on that promise, showing us that costs will overrun on all projects by a fair bit. To see that in a much more local London setting we see places like the Aecom tower and the stage where ‘overly enthusiastic‘ contemplation was set until we got: “profit was “lower than expected due to the losses taken on an underperforming project in one of the company’s core market segments”“. This matters, there is a speculative approach to construction projects and the stage is not merely on how things are pushed, it is on how pricing models are staged and presented by all and that requires a much larger oversight, or better stated, it needs additional scrutiny on a few levels. There is a stage that clearly is part of the Interserve failure. Even if the ‘new’ model implies that we might optionally see: “the tower will now house 861 apartments of which 765 were for private sale, the adjustment now allows for a private sale of 813 apartments“, screwing over even more social housing points. If that is allowed, certain councils should be overhauled and those parts of the stage allowing for that should be required to be facing the dock and optionally dismissal of the project as well as the investment amounts to be considered a total loss. There is a lot wrong in this entire stage and it all started with optional pricing models that were seemingly not realistic in the first place. Carillion clearly showed that element as I personally see it and whilst the board of Interserve is contemplating what to do over the next few months, they to require a level of scrutiny that is a lot larger than anything we considered before. The Greenland Group and Aecom, merely illustrate that what we are seeing in the Battersea Power Station debacle as well as a much larger stage of construction jobs out there (Interserve pricing anyone?).

So when the Financial Times gave us merely a day ago: “A refinancing arrangement between its Malaysian owners has been delayed for the third time; the cost of labour and materials is increasing; the developers have more than halved their expected returns and there are disputes with Transport for London over the cost of the Northern Line Underground extension to the area“, we see that the pricing stage for construction companies (as we clearly see with Interserve) is a much larger concern, we could argue that someone is dampening the cost and margin part merely to get things started and in that trend, we might need to consider other avenues. Perhaps consider nationalising projects in this stage and those shareholders and investors will have to live with their 100% losses. Why leave this level of unacceptable pressure on taxpayers and governments?

And the fake messages of keeping Britain good for investors also required those pricing goons to consider that it comes at a cost. If the players cannot do their job, then those hurt must seek legal consideration against those firms using flaccid pricing models, making matters worse for Interserve, but should we actually care at that stage?

There is every consideration that Interserve goes to the Hospital whilst the projects in wales go to the morgue, but personally I do hope that it is the other way round, as the Battersea Power Station project implies (and a few more beside that); the entire problem on construction has been around for close to 5 years, implying in my personal opinion that these problems started long before Interserve was in the deep financial problems it currently is in, giving rise to several issues that require discussion in the House of Lords at the very least, and perhaps starting the discussion of that agenda no later than week 2 of January 2019 would not be the worst idea as I personally see it.

Do you want to see an avoided discussion on how a health centre went to the morgue no matter where it was supposed to be built?

 

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