HSBC sees Berendsen's UK investment costing more

HSBC has downgraded Berendsen to ‘hold’ from ‘buy’ and chopped its target price to 940p from 1,070p as it believes that the commercial laundry company's proposed investment in the UK is going to cost more than management currently calculate.

HSBC said that investing in the UK is going to cost more and the company guides of a 2017 earnings before interest, tax and amortisation (EBITA) of £150m, as the consensus by Bloomberg forecasts £164.5m.

Berendsen said it will spend £150m a year on its plants and equipment for next three years, while new management, higher central costs and some effects of the National Living Wage will drive costs up initially, but the company is confident that margins will improve.

Last Friday, the company was the biggest faller of the FTSE 250 index as it posted a rise in full-year profit and revenue but was more cautious on the outlook as continues to be affected by "legacy issues".

The company’s guidance for 2017 was an adjusted operating profit of £150m, which is 12% below consensus of £170m, and said results are expected to be more second half weighted than previously due to legacy issues in the UK.

In light of this, HSBC updated its forecasts for foreign exchange rates, the UK performance, the new guidance and lowered Berendsen’s earnings per share by 12% in 2017 and 11% 2018.

HSBC has assumed that planned investments made in the UK will begin to bear material fruit from 2019 and so derives the target price by applying a price estimate 16 times on the 2017 earnings per share, which implies a target price of 940p, a 1.3% upside.

To deal with its legacy issues, the company plans to use its CL2000 production concept, as its uses in Europe, to the UK workwear markets and in the healthcare and hospitality business a new plant will be made more efficient in the next three years similar to the CL2000 plant used in the workwear business.

Berendsen believes that after a period of transition, it will make a 15% return on capital employed on these investments and its performance will be second half weighted.

Shares in Berendsen were down 2.37% to 804p at 0826 GMT.