After the distributor, one of the FTSE 100’s handful of beautifully-boring business services companies, reported a deterioration in organic growth and margins last month, blamed on weak global economic conditions.
“We think Bunzl’s recent deterioration in organic growth and margins could presage much more entrenched long-term structural underperformance,” Berenberg’s analysts told clients in note on Monday.
With Bunzl growing at sub-GDP rates last year it could be viewed as a one-off, but the analysts are not so confident, reckoning instead that it “more likely heralds a new chapter of disintermediation, price transparency and underlying margin attrition”.
Seeing “cracks” appearing in the operating model, the analysts have taken a new approach to valuing Bunzl’s shares, driving a big cut in the share price target to 1,650p from 2,350p.
Mixed report for business services sector
This was part of a wider note from the bank on the business services sector, where, the analysts examined company-specific investment cycles rather than focusing exclusively on the supply side of each industry, “in order to determine who is positioned competitively” and who can therefore generate either near-term earnings or cash flow momentum, or deliver excess returns for a longer period than the market is pricing.
This did not result in any ratings changes for other London-listed companies in the sector.
Elsewhere, price targets were lifted, with Intertek PLC’s (LON:ITRK) up to 5,300p from 5,050p; Aggreko PLC (LON:AGK) moved to 650p from 600p; and Ashtead Group PLC (LON:AHT) nudged to 2,250p from 2,150p.
Peel Hunt downgrades Ashtead, Equiniti and Serco
Top picks for the Peel Hunt team included ‘conviction buys’ Balfour Beatty (LON:BBY), DCC, Homeserve Plc (LON:HSV), Morgan Sindall PLC (LON:MGNS) and Restore Plc (LON:RST), with preferred small caps being Galliford Try PLC (LON:GFRD), Inspired Energy plc (LON:INSE) and NWF Group plc (LON:NWF).