UK-focused outsourcers Serco Group PLC (LON:SRP), Equiniti Group PLC (LON:PLC) and Page Group PLC (LON:PAGE) have been downgraded by Credit Suisse amid a more difficult economic environment following the Brexit vote.
In a note on the business service sector, Credit Suisse said it has adjusted its ratings and target prices on a number of stocks to reflect “improving macro conditions in Europe, a tougher backdrop in the UK (notably around the public sector and consumer confidence), a lower cost of equity and the evolving impact of technology on segments of the sector”.
The financial services firm cut its rating on construction contractor Serco to ‘underperform’ from ‘neutral’ and lowered its target price to 85p from 120p.
“Although we continue to hold Serco’s management in high regard and believe they have done well to restore the health and prospects of the group, the political backdrop has become less conducive to a longer-term margin recovery,” Credit Suisse said.
“Despite factoring in recent opportunistic merger and acquisitions (M&A), we lower our fiscal year 2018 and 2019 earnings per share (EPS) by 8% and 15% respectively to reflect weaker near-term prospects in the UK/Middle East.”
In November, the company said it was backing away from its bid for a number of Middle East rail contracts worth £2.5bn, leading to the big-ticket bid pipeline shrinking by one-third. Combined with the impact of Brexit uncertainty on public sector outsourcing, the company has become arguably over-dependent for pipeline replenishment on the US and Australian markets mid-term, Credit Suisse said.
UK recruiter Page Group saw its rating slashed to ‘underperform’ from ‘neutral’ and its target price cut to 430p from 500p.
Page Group hit by slowdown in UK hiring
Credit Suisse also reduced its EPS estimate for fiscal year 2018/19 by 3-5% as it expects more difficult conditions in the UK and ongoing challenges in the permanent recruitment market. Hiring in the UK, particularly for permanent roles, has slowed since the Brexit vote.
“We think Page’s exposure to perm recruitment (76% gross profit in H117 and lack of a Recruitment Process Outsourcing (RPO) operation equivalent to Robert Walters' Resource Solutions or Hays’ HTS businesses, makes Page vulnerable to the continued demand shift among large corporates from an agency to a direct-hire process, particularly in the more mature end markets, in our view,” it said.
Equiniti faces UK headwinds
Credit Suisse downgraded tech and finance services firm Equiniti to ‘underperform’ from ‘outperform’ and reduced its target price to 270p from 300p, saying it expects a weaker performance over the next year and sees “better momentum and value opportunities elsewhere in the sector”.
Organic revenue growth in the UK faces headwinds from contract rebasing and inherently less-predictable corporate actions activity faces tougher comparatives, Credit Suisse said.
Experian upgraded on buybacks and M&As
On the upside, it raised credit checking agency Experian PLC (LON:EXPN) to ‘outperform’ from ‘neutral’ and lifted to target price to 1,900p from 1,530p, saying it estimates organic growth will accelerate, boosted by ongoing buybacks and M&As.
Credit Suisse expects trading within the consumer services division to improve through the second half of 2018 and fiscal year 2019 but to remain constrained by the ongoing shift away from the credit education subscription offering.
Bunzl valuation an 'attractive entry point'
“Trading at a five-year relative low, we think Bunzl’s underperformance has been driven by (1) fears of the disruption risk posed by AmazonBusiness; (2) concerns around the sustainability of the group’s M&A strategy; and (3) underlying organic EBITA margin compression,” Credit Suisse.
However, Bunzl’s valuation creates an attractive entry point for a relatively defensive business with ongoing M&A optionality globally, it added.
Ashtead to benefit from US hurricane damage rebuilding
“Following Ashtead’s strong second quarter earnings, raised 2018 capital expenditure guidance and our inclusion of £1.15bn of buybacks over the 2018-2020 period, we raise our EPS estimates by 5%, 8% and 14% for the 3 years respectively.”
It added: “Following the catastrophic hurricane damage across the southern US which is likely to require a multi-year rebuild effort, already robust underlying demand has been given an incremental boost.”
Credit Suisse also repeated an ‘outperform’ rating on specialist staffing firm SThree PLC (LON:STHR) and lifted its target price to 445p from 420p, citing a sector-wide reduction in the cost of equity and a strong fourth quarter update..
Recruiter Robert Walters PLC (LON:RWA) was also left at ‘outperform’ with its target price hoisted up to 730p from 650p, with Credit Suisse pointing to a lower cost of equity in the sector and improving macro-economic conditions in Europe where it has a large chunk of business.