Bunzl PLC (LON:BNZL) was downgraded to ‘neutral’ from to ‘overweight’ while Sanne Group PLC (LON:SNN) was upgraded to ‘overweight’ from ‘neutral’ as JP Morgan looked at the business services sector.
However, pest control firm Rentokil Initial PLC (LON:RTO) remains the favourite among structural growth names as outsourcing giant Serco Group PLC (LON:SRP) is deemed “a mispriced opportunity”.
READ: Bunzl snaps up another PPE distribution business
The sector has weathered COVID-19 relatively well, but most companies should see strong earnings growth in 2021, according to the US investment bank.
There are two ways to play the sector, according to analysts, which are to look for either names exposed to the cyclical recovery or structural stories that can generate value despite the year-to-date re-rating.
Key for the sector is to look at potential through a combination of recovering top lines, further outsourcing, market share gains and consolidation through mergers and acquisitions.
“Larger business services companies have weathered the COVID-19 crisis better than small peers and generally provided better service to customers, helped by superior investments in digital tools,” analysts commented.
“The larger and better capitalised companies are also able to invest in growth and M&A in the early stages of the recovery, enabling them to lead the consolidation of still fragmented end markets, as business owners reconsider their commitment or competitors look to simplify their portfolios.”
