The UK economy is stalling and the eurozone continues to be battered by a debt crisis. That's almost reason enough to take a negative view on shares in workwear and hotel linen cleaning firm Berendsen. After all, it derives all its revenue from the UK and Northern Europe, has high levels of debt and operates with costs it finds difficult to shed.
- Decent dividend yield
- Good cash generator
- High fixed costs
- Exposed to vulnerable sectors
- All revenue comes from UK and western Europe
- Cost of debt rising
The UK's unemployed now total more than 2.5m, a 17-year high. So it's surely just a matter of time before fewer uniforms and less workwear needs washing. In 2009, Berendsen saw its manufacturing supplies hit hardest, with its Swedish workwear division seeing a drop of 25 per cent in volumes - a real problem given that workwear makes up a third of its revenue.
True, total workwear revenue only fell 2 per cent in 2009 as Berendsen benefited from servicing clients in the food processing and pharmaceuticals industry, which are comparatively resilient. But back then the private sector took the brunt. This time round there could be the double whammy of private and public sectors hitting the buffers. That would hurt the healthcare and local government contracts that Berendsen also supplies.
So, with the outlook for sales tough, how will that hit returns for shareholders? Here there is some good news. Berendsen usually generates lots of cash and its dividend is forecast to be covered more than twice by earnings (see table), so the payout, which generates a nice yield, should be safe.
BERENDSEN (BRSN) | ||||
|---|---|---|---|---|
| ORD PRICE: | 439p | MARKET VALUE: | £754m | |
| TOUCH: | 439-440p | 12-MONTH HIGH: | 569p | LOW: 391p |
| DIVIDEND YIELD: | 4.8% | PE RATIO: | 10 | |
| NET ASSET VALUE: | 284p | NET DEBT: | 109% | |
| Year to Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 954 | 60.4 | 24.5 | 20.0 |
| 2009 | 971 | 61.7 | 26.6 | 20.0 |
| 2010 | 986 | 34.6 | 12.9 | 21.2 |
| 2011* | 994 | 96.6 | 41.6 | 21.2 |
| 2012* | 1007 | 100 | 43.1 | 21.2 |
| % change | +1 | +4 | +4 | - |
Normal market size: 2,000 Matched bargain trading Beta: 0.8 *Evolution Securities estimates (Profits & earnings not comparable with prior years) | ||||
That barely makes the share price look less vulnerable. After all, the rating - 10 times forecast earnings for this year and next - looks high compared with shares in Johnson Service and Rentokil Initial, where the ratings are 7 times and 9 times forecast earnings respectively. True, neither company is wholly comparable (Rentokil is a far more diversified affair). Even so, Berendsen's shares don't warrant the premium, especially as their rating troughed at 4 times earnings in 2008.
Besides, Berendsen runs on lots of fixed costs. The business of collecting, washing and returning linen and workwear requires washing machines, vehicles and warehouses, all of which Berendsen owns. These impose costs that are difficult to trim even when revenues dip, and that can smash profits. Berendsen also faces headwinds from rising energy prices and high textiles prices.
Then there is its debt pile, which was £613m at the end of June. The interest charge on this was £13.7m in the first half of 2011, but it is set to rise after a borrowing facility was renewed at higher rates. The problem is not the payment as interest is covered 10 times by operating cashflow, it is that as it grows and revenues struggle it will eat into earnings.
