Investors in Interserve are paying for predictability, and in that sense, yesterday’s first-half update from the construction and support services specialist did not disappoint.

Trading in the six months to June 30 has been strong, putting the company on track to post a near-10 per cent rise in full-year earnings. Further, it has won a £50 million contract to build the first desalination plant in London that will turn the brackish content of the Thames into water fit for the capital’s reservoirs.

Like Carillion and WS Atkins, which have also reported in recent weeks, Interserve is benefiting from booming infrastructure spending in the Middle East, a region that accounts for about one third of forecast operating profits. In the UK, which takes up most of the balance, about two thirds of its work is drawn from the public sector – principally contracts to build, maintain and operate schools, prisons and hospitals – where long-term revenues are underpinned by government spending.

Interserve has not been immune from the downturn, however. It has a small business (with turnover of £15 million, or less than 1 per cent of sales) that fits outs shops and hotels, which is starting to struggle.

Interserve’s mechanical and electrical engineering operation is also feeling the effects of slackening private sector demand.

The broader momentum remains intact. In particular, its purchase two years ago of MacLellan appears to have achieved its objective of balancing Interserve’s traditional construction skills with a presence in contracted support services, such as security and cleaning. That diversity means that its shares – at 440p, up 13½p, or ten times current-year earnings – continue to trade at a discount to pure support services providers, but at a premium to its construction services rivals. However, with overseas work growing strongly, a defensive position at home and the value of its PFI portfolio – put at £150 million by KBC Peel Hunt – underpinned by demand for liability-matching assets from pension funds, there are worse corners of the stock market in which to remain. Hold.

Begbies Traynor

Buying on a profit warning requires bravery, but in the case of Begbies Traynor, such pluck has paid off. Anyone who followed Tempus’s advice to pick up stock in the AIM-listed insolvency practitioner after December’s earnings alert will have nearly doubled their money: up from 88p to Tuesday’s 169p in seven months.

Begbies’s problem was that it had continued to grow in anticipation of a rise in corporate insolvency work that took longer than expected to materialise. The result of that operational gearing – in the form of an underutilised workforce – was that adjusted pre-tax profits for the 12 months to April 30 were 24 per cent lower than previous numbers.

But as yesterday’s figures show, it was a financial year of two halves. After a flat first six months – in which insolvencies touched a 20-year low – the deferred effects of the credit crunch meant that organic revenue growth was running at 11 per cent in the second half. That trend looks set to accelerate. Corporate insolvencies – which account for three quarters of Begbies’s fees – are rising at the rate of nearly 30 per cent a quarter.

The figures also show that, having steadily expanded its network through bolt-on acquisitions and overseas alliances, Begbies is steadily winning work for which it might previously have been deemed too small. Its recent roster includes high-profile failures such as Silverjet, Carlyle Capital Corporation and Alphasteel. The growing conflicts of interest faced by the Big Four accountancy firms, its biggest rivals, suggest that Begbies should win more such assignments – especially given the strictures of Sarbanes-Oxley, which was not in force at the time of the last downturn.

At yesterday’s 160½p – the shares fell 5 per cent after current-year profit forecasts were left on hold – Begbies sits on a forward multiple of 18 times. However, with trends in business failures turning firmly its way, it is worth holding on.

LSE

Given Tuesday’s 7 per cent fall in London Stock Exchange shares, there was probably only one way for them to go yesterday and the first-quarter trading update was a little better than expected. Total revenues were up an above-forecast 8 per cent on the year to £178 million, with trading revenues ahead – albeit by 1 per cent – despite a fall in the value of equities traded. Sales of data and post-trade services (essentially clearing and settlement) also beat estimates.

So the shares gained 69p to 740p, more than reversing their previous loss. But as the statement shows, the worries that have pushed them to little more than a third of their bid-driven peak last year are still there. The amount of business going through London is falling, and this is even before Turquoise, the new trading platform being put together by a group of investment banks, starts its trials next month before going live in September. It is inconceivable that Turquoise will not take market share from the LSE and it is hard for investors to ignore the triumphant noises coming out of existing rivals such as Plus and Chi-X. The launch of two alternative trading networks – BATS and Nasdaq OMX, also due in September – only adds to the pressure. Yesterday’s move by Russian regulators to restrict the proportion of shares in natural resources companies that can be sold abroad, which has hitherto provided the LSE with a steady flow of global depositary receipt IPOs, provided a further blow to its struggling issuer services division. All of which suggests that, even at ten times forward earnings, the shares are best avoided for now.

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