Berendsen boosted by RBC upgrade

7th Feb 2017 09:01

(ShareCast News) - Commercial laundry group Berendsen got a boost as RBC Capital Markets upgraded the stock to 'outperform' from 'sector perform' and lifted the price target to 950p from 900p.The bank acknowledged risks around the UK turnaround and execution of the chief executive's strategy, but said Berendsen is fundamentally a good business and the valuation now discounts these downside risks."We believe the UK is in the price for nothing and the dividend and balance sheet are supportive," it said.RBC noted the UK only now accounts for 15% of forecast group profits, adding that forecasts are now very conservative. For instance, RBC estimates only £6m UK flat-linen profits in 2017E - another leg down from £10m in 16E.It said the UK operational issues will take time to resolve and the solution will require plant investment."There is some risk of further disruption and customer service issues, and management has to be careful not to destroy the strong local relationships by making too much change too quickly. We expect detailed turnaround plans at FY results on 3 March. However, the group continues to have strong market positions in what is a capital-intensive business, where scale matters and improvements should hence be achievable over time."In addition, RBC pointed out that the European business looks in good shape and has not been hit by under-investment issues. This is positive for mix, given margins are significantly higher than in the UK at 20% versus 7%."The overall outlook looks positive given relatively robust GDP and potential for further outsourcing. Market positions are strong in Scandinavia and Benelux, and in Germany growth should remain strong as Berendsen takes share from smaller players, with the potential to further consolidate the market. It may also benefit from some fallout from the Rentokil/Haniel link-up."At 0943 GMT, Berendsen shares were up 4.8% to 886.50p.