The support services sector will not only be hit in the fallout from the coronavirus pandemic but also will see a muted rebound next year, the analysts said.
Bunzl, the FTSE 100-listed distributor, was downgraded from its previous ‘neutral’ rating as the share price target was slashed to 1,500p from 2,150p on the back of a 29% cut to earnings per share this year and 15% for the next.
“Our analysis suggests that Bunzl will not prove as defensive as the market expects over the next two years, due to a combination of high end-market exposure in the weakest parts of the economy and growing pressure on volumes from sustainability initiatives,” the analysts said in a note.
Looking around the sector, operators will be “significantly impacted as customers reduce activity in the Covid-19 fallout” with UBS forecasts pointing to an average decline of 11% for organic growth for the whole of 2020.
But as balance sheets are largely healthy and the sector has uncharacteristically underperformed in the sell-off, the analysts said they “believe investors can soon turn to 2021 recovery prospects”.
However, the only two UK names in the “most preferred” list were Electrocomponents PLC (LON:ECM) and Experian PLC (LON:EXPN), while other ‘buy’-rated stocks included Serco Group PLC (LON:SRP), DCC PLC (LON:DCC) and Homeserve (LON:HSV).
G4S PLC (LON:GFS) was downgraded from ‘buy’ to ‘neutral’, joining Hays (LON:HAS), Capita PLC (LON:CPI) and PageGroup PLC (LON:PAGE), which are all stocks where the analysts expect a soft rebound in 2021, with earnings forecast to remain around 40% below their 2019 levels.