Public sector squeeze to hit firm's profits

The Reading-based company said cost pressures on some newer public sector deals meant more of its profits would fall in the second half of the year than usual.

The firm remains confident the deals will deliver their "full potential" and left its expectations for the year as a whole unchanged.

But Interserve added that the wider market remained "very competitive" and expects the rest of the year to be "challenging".

The group's support services arm accounts for more than a third of revenues, carrying out management services such as cleaning and maintenance for clients from local authorities to private sector customers including HSBC.

The company's equipment services arm – which supplies plant and heavy machinery mostly to clients in the Middle East – is also suffering from strong trading comparisons with last year and "tough" market conditions.

But Interserve added that its UK construction business was performing well, boosted by public sector work and contracts for major utility firms.

The company said it has visibility on 90 per cent of its revenues this year and 70 per cent in 2011, leaving it well-positioned despite the "restraint" to come in UK public sector spending.

Shares rose three per cent yesterday although some analysts remained concerned over the potential impact of the spending cuts on the group.

Investec analyst Guy Hewett, who said nearly 30 per cent of Interserve's sales came from public sector building contracts, expects the group's annual profits to slide by 10m to 68.5m this year.