Berendsen Conference Call and Arcadis
The Berendsen conference call was disappointing. Clearly the long term earnings capacity of the business is not around 15-20% lower now than it was last night. The problems seem to be short term ones. All is not lost and on a 2/3 year view the business could be worth much more than it is now but the risk has suddenly increased and that will hit valuation.
The Berendsen conference call was disappointing. There was a great deal of MBA speak. The problem appears to be that UK plant capacity was stretched in the summer such that a two day breakdown at one plant has triggered a £10m shortfall in operating profit guidance for this year at AER and near £15m at CER. That has triggered a £350m reduction in the market capitalisation of the business this morning. The 6% fall in guidance in operating profit this year from the consensus of £170m to £160m.
The explanation of the currency tailwind and acquisition effects could have been better but it’s fair to say that operating profit this year will, at CER, be roughly similar to the £153.8m earned in 2015. So the real decline is 10%. No surprise that the stock is down 17%; not far off the 1% fall in consensus triggering a 2% fall in price we mentioned earlier. Management stated that Brexit had no impact on the business ignoring perhaps that a 15% decline in sterling might just impact on distribution costs (higher fuel costs) and the cost of capital items such as workwear and linen which it rents out here and buys overseas.
Clearly the long term earnings capacity of the business is not around 15-20% lower now than it was last night. The problems seem to be short term ones. There may an issue regarding why a problem that occurred in the summer is reported only now. Maybe management thought it could make up the gap and only now has realised it cannot. Or maybe there are communication issues. So the prospect of a repetition of the issue and the communication of it (timing and content) remains and that will spook investors for some time.
The Berendsen Excellence strategy is said to have key elements of customer focus; operational excellence; organisational capability; and effective use of capital. Those things might sound to some as being what management should be doing as the just the basics to earn its money and are not strategic. In teh recovery phase they were enough. There was no indication today of how Berendsen will satisfy customers better than the competition and of the people in the company and how they might work and be motivated; the statement and the conference call lacked a human angle which may be an issue for some people.
It is going to take a while for Berendsen to rebuild confidence, in our view. It had a premium rating reflecting the stock being a safe haven, until today. But the downgrade in earnings guidance seems to be out of proportion to the difficulties faced in the operations and that will hit confidence for some time. The problems do not appear to be systemic but could be repeated so it may be that at 1023p and with around 63p of EPS this year the stock is up with events at 16x prospective p/e. All is not lost and on a 2/3 year view the business could be worth much more than it is now but the risk has suddenly increased and that will hit valuation.
We did not mention the troubles of Arcadis earlier. The CEO has stepped down after five years and the CFO has stepped up into the role on an interim basis. The catalyst for the somewhat unplanned departure seems to be a challenging Q3 performance , impacted by difficulties in Emerging markets and weakness in sterling. UK revenue was down 9% in Q3 but that was chiefly currency as underlying revenue grew 3%. Revenue in the UK water and Infrastructure segments grew but building revenue was down as projects were put on hold. The read across from Arcadis is that decisions on building projects in the UK are being slowed due to Brexit. Of course there is plenty of other work for UK consultants on large scale projects (HS2, Heathrow, Thames tideway, etc). But in terms of property related work the evidence from Arcadis is that its slowing down while Queen Theresa sorts out what Brexit means.
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