Berendsen slumps on Barclays downgrade

Shares in commercial laundry company Berendsen were under pressure after Barclays cut the stock to 'underweight' from 'equalweight' and slashed the target price to 700p from 911p.

The bank pointed to elevated levels of execution risk and questions over the merits of a meaningful step-up in growth capex.

Barclays said that less than 18 months on from a strategic review that reported a “well invested” business with “strong foundations” and committed to free cash conversion of 75- 90% and a double-digit return on invested capital, Berendsen has reported significant operational issues in the UK.

It noted the sizeable increase in capex which decimates the cash conversion target and sees ROIC back into single figures for at least the next few years.

"While we do not dispute the need for a step-up in capex to address previous underinvestment, we are (a) slightly alarmed by the initial assessment of the situation in November 2015 and (b) slightly puzzled by the additional growth capex plans – has the view of end markets changed so much since the strategic review in November 2015 that a £150m+ increase in capex is merited for a business which has historically grown only slightly ahead of GDP?"

The bank said undertaking a major capex programme is a challenge for any business but is even trickier to execute while churning around 40% of the UK managers, embarking on a major re-training exercise for existing employees and putting in place a series of new systems.

At 0947 GMT, the shares were down 4.3% to 821p.