The term ‘business services’ spans an unlikely array of sectors. Pest control, recruitment, logistics, and equipment hire all fall under this banner, and any attempt to draw granular comparisons is likely to fail.
Yet many of these companies are thriving in situations where other sectors are struggling. The worker shortage means recruitment agencies are a prime example at the moment. Hays (HAS) and PageGroup (PAGE) have both celebrated “record” performances, with Hays reporting its fastest ever profit growth.
The red hot job market – which has led to staff shortages elsewhere – has turbocharged recruiters’ profits after a difficult lockdown period. Management has noted improvements in fee rates due to a lack of candidates, and quicker hiring as a result of video interviews. Meanwhile, profit per fee earner is rising steeply, despite some companies replacing senior staff with more junior hires.
Logistics and distribution companies are also benefiting from unusual market conditions – albeit different ones. Delays at ports and warehouses have underlined the importance of resilient supply chains, and the likes of Clipper Logistics (CLG) and Bunzl (BNZL) are cashing in. Before Christmas, Clipper announced a host of new contracts with retailers and reported strong growth across both its divisions.
The question is whether these companies will keep thriving once the economic backdrop changes. Recruitment agencies are highly cyclical businesses and investors are already showing signs of wariness: shares in PageGroup are almost 30 per cent lower than at the start of the year, despite a series of chipper trading updates from the industry. As ever, there is a large question mark over how recruiters will cope if the global economy takes a turn for the worse.
Despite their tight margins, logistics companies look more resilient. Analysts argue that companies are more inclined to outsource their operations than ever before, having realised it’s a false economy to penny-pinch on logistics. Ecommerce is also a big driver of growth, as businesses seek to improve their online offering.
Clipper is now due to be taken over by its New York rival GXO Logistics (US:GXO), which could have a “very positive read-across” for the wider industry, according to analysts at Peel Hunt.
This American interest has a mirror image in the sector's bid to expand across the Atlantic. Other companies across business services are striving to “conquer America” – and seem to be succeeding. HomeServe (HSV), the home repair specialist, is gaining traction in North America, where consumers tend to be more insurance minded. “Affinity partner households" – which indicate the size of an addressable market – increased by 7mn to 73mn in the year ending 31 March 2022, and policy retention remains strong at 85 per cent.
Equipment rental company Ashtead (AHT) is also expanding rapidly across the Atlantic. The bulk of Ashtead’s earnings already come from the US, but the group has recently opened 58 new locations in North America. Given the fragmented state of the US market, which is filled with small independent operators, this is a canny move. Acquisition opportunities abound.
Pest control expert Rentokil (RTO) is already on a buying spree: it made an impressive 52 bolt-on acquisitions in 2021, and edged closer to its strategic goal of becoming the “number one player in North America”. Despite splashing out £495mn on these purchases, it still had room to increase its dividend by 18 per cent to 6.4p per share.
Business services are not simply at the mercy of economic conditions, therefore. There are plenty of structural growth opportunities – particularly overseas. However, the nature of the sector means some companies are heavily reliant on trends that could prove transient.
NAME | Price (p) | Market cap (£mn) | 12-month (%) | Fwd PE | Yield (%) | Last IC View |
Ashtead Group | 4,817 | 21,383 | 4.0 | 20 | 1.1 | Buy, 6,402p, 7 Dec 2021 |
Bunzl | 3,163 | 10,672 | 30.0 | 19 | 1.9 | Hold, 2887p, 28 Feb 2022 |
Clipper Logistics | 861 | 894 | 30.0 | 32 | 1.5 | Hold, 880p, 21 Feb 2022 |
Diploma | 2,884 | 3,594 | 1.0 | 29 | 1.7 | Buy, 3,402p, 22 Nov 2021 |
Electrocomponents | 1,074 | 5,059 | 1.0 | 22 | 1.8 | Buy, 1,167p, 12 Jan 2022 |
Essentra | 333 | 1,005 | 10.0 | 14 | 2.1 | Hold, 284p, 30 Jul 2021 |
Experian | 2,784 | 25,673 | 4.0 | 29 | 1.5 | Buy, 3,513p, 6 Jan 2022 |
Hays | 127 | 2,110 | -19.0 | 15 | 8.2 | Hold, 137p, 24 Feb 2022 |
HomeServe | 854 | 2,872 | -24.0 | 20 | 3.0 | Hold, 891p, 16 Nov 2022 |
Intertek Group | 5,062 | 8,170 | -16.0 | 24 | 2.2 | Buy, 5,318p, 1 Mar 2022 |
IP Group | 90 | 930 | -31.0 | na | 0.0 | Buy, 122p, 5 Aug 2021 |
IWG | 269 | 2,706 | -24.0 | 46 | 0.8 | Sell, 299p, 30 Sep 2021 |
MITIE Group | 52 | 744 | -19.0 | 7 | 2.5 | Hold, 70.6p, 18 Nov 2021 |
PageGroup | 497 | 1,634 | -7.0 | 11 | 7.7 | Hold, 541p, 3 Mar 2022 |
Rentokil Initial | 524 | 9,766 | 2.0 | 28 | 1.2 | Buy, 511p, 3 Mar 2022 |
Source: FactSet |