Morgan Stanley downgrades Berendsen on competition concerns

Berendsen not only needs to invest in property, plant and equipment but is facing increasing competition in the UK, warned Morgan Stanley as it downgraded the stock on Friday.

With equipment in the UK business dating from the 1970s and often obsolete and not well maintained, repairs, accidents and fires occur on an increasingly regular basis, increasing group operating costs by £20m and "disabling its ability to provide an adequate service to its customers".

But Morgan Stanley, which moved its recommendation to 'underweight' from 'equal-weight' and cut its price target to 645p from 950p, said increasing competition was a better explanatory factor for the commercial laundry group's profit downgrades.

Johnson Service Group, which operates within workwear and
hospitality to cover 66% of Berendsen's UK business, doubled revenues since 2012 via strong organic growth and acquisitions, gaining 16% more relative market share as Berendsen focused on margin and cash conversion.

The competitive threat makes management's target of 15% return on capital employed seem "unachievable" by the planned 2021,Morgan Stanley said, as it implies 9.5% compound annual growth rate on adjusted operating profits, which has not been achieved in the last 10 years.

Berendsen expect incremental profits of £20m from organic growth, £20m from cost savings and £25m from market share gains.

"This will require retention of all cost savings and M&A, which is difficult given the leverage and stronger competition," analysts wrote, with the target price base case assuming 50% of the cost savings are retained, with the balance reinvested, with growth in line with the industry.