Interactive Investor

ISG raises cash after huge loss

3rd March 2015 13:27

Harriet Mann from interactive investor

Shares in construction services group ISG hit a seven-year high at the end of 2014 after the order book broke above £1 billion. Prospects for this year looked exciting, too. But a two-year bull run ended abruptly last month when a profits warning wiped out a third of the firm's value. Now, first-half results and a surprise fundraising have plunged the share price to a 20-month low.

It's all down to ISG's UK Construction division, which is having trouble with contracts agreed over 18 months ago. It's is in the process of sifting through poor-performing contracts and has offloaded some, with a "significant" provision made against a contract entered into in 2012 affecting these results for the half-year ended 31 December. Since the end of the period, ISG has also reached a settlement with the client within this provision, the firm said. Over the period, US construction reported a loss of £16 million.

True, progress was made elsewhere, with the UK Fit Out and Engineering Services division doubling operating profit to £6.6 million, UK retail making £3.8 million, up from £3.2 million, and the international business inching slightly higher to £2.4 million. ISG has worked with Nespresso, Primark, Barclays and Louis Vuitton, and has left its mark across much of the UK. But across the group, losses of £20.8 million were reported, £7.2 million on an underlying basis.

To cope, management has scrapped the dividend and raised £16 million from share placing at 170p. It must stump up an extra £1 million in the second half to pay for the fundraising and after negotiating extra bank facilities. It could raise another £3 million at the placing price if there's enough demand.

Nick Spoliar, an analyst at broker WH Ireland, says: "There is potentially a further broker option in relation to up to 1.7m shares. At a 29% discount (170p), this represents a TERP (Theoretical ex-rights price) of 222p. We will revisit our forecasts and recommendation following the analyst meeting, but anticipate broadly retaining them (with adjustments for costs). Our FY2015E forecast is £8.0m / 15.6p."

ISG shares plummeted 30% Tuesday to 167p, half their value at the beginning of February, and they now trade on 13 times forward earnings. Even that's not cheap given recent trouble, and investors will rightly demand evidence of a turnaround before confidence returns.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.