Saturday, October 25, 2014


Got this idea from Gannon and Hoang on Investing.  They explain Berendsen's business model and competitive advantage well - in the rental and laundering of textiles for organizations, transportation costs are a major part of such services so clients are clustered around plants, which helps prevent competitors moving in.  Its a route density game.

They have traditionally done workwear and linen (for hotels and hospitals), but are not moving into mats, washroom services and cleanroom.

Client contracts are usually for 3 years, sometimes 5.  They mention they have a 94% retention rate in 2012 - this means that, if contracts average 3 years, around 4 out of 5 customers whose contracts end, do renew.

They grow through acquisitions, and expect more acquisitions going forward.

Competitors and Market Share

From their 2012 AR, their markets are "characterised by both a small number of major players – including Berendsen – which operate across national boundaries and niche operators who compete in specific marketplaces."  They have a roughly 15-30% market share for the segments they operate in:

They say they are the market leader in Denmark, Sweden and Norway (not sure for which segments), as well as in the UK for textile rental and laundering. 

Overall, they are a major player, but do not dominate the industry.  Any dominance would be at a local, regional level, which we don't know about (and they wouldn't care to advertise).


Earnings are currently understated by around 20-25% due to customer contract armortization.  This is an accounting requirement to list the values of customer contracts (usually valued by DCF) in acquired companies on the balance sheet (separately from goodwill).  They are armortised  "over the period in which the company is expected to benefit from the contracts acquired, over periods ranging from two to five years."  No accounting done for probability of reacquiring contracts.  Therefore, if the contract is renewed after expiry at the same margins, earnings will shoot up by this amount. The company's 'operating profits' adds back this contract amortization amount to the earnings.

CFO is quite consistent, and higher than earnings as mentioned above.  The largest part of CFI is spending on PPE, which is quite steady, but acquisitions costs are very lumpy, which affect FCF:


Are their results cyclical? Probably a little.

Demand for some of their services is cyclical:
  • Linen for NHS is not.
  • Common sense would suggest that mats and washrooms would not be.
  • Linen for hotels is; it depends on hotel building and occupancy.
  • Workwear is cyclical, especially in mature markets where they already lead (e.g.: Sweden in 2009).  Workwear in growth markets may have a downturn masked by growth.
How much of their costs are fixed?  High fixed costs make will profits swing wildly on small changes in revenue.  Roughly 80% of Bersenden's costs are fixed. And the remainder is unknown or can't be classified.  Inventory is the only variable costs given and is negligible.  A breakdown is below - amortization of customer contracts has been added back into PBT to show operating profit:

What was the effect of the 08/09 crisis on revenue and profits?

Revenue did not decrease:

Probably due to the growth from by high acquisitions in 07/08 just before the crisis:

Profits dropped 10m in 08 due to higher interest charges on increased debt.  The decline in profits was also due to heavy 'exceptional' write-offs in 08, 09 and 2010.

We can't tell if this was cyclical or just an acquisition gone wrong.  The downturn in profits in the last recession was reflected in 'exceptional' write-offs, not in lower revenues and (not much in) operating profits.  Makes sense for a company that grows by acquisition and therefore has plenty of goodwill on the balance sheet.

In the last recession, we saw a 30% drop in operating profits (from 2007 to 2010), which may have been softened by overall growth from acquisitions. CFO was flat during this period, the difference was mostly due to 'exceptional' writeoffs.

Balance sheet

Total Debt at 1H 2014 is 511m, or around  4.6X 2013 operating profits.  A little higher than I like, but OK for a growth company.  Interest payments plus operating leases (total: ~47m) are less than a half of operating profits (110m). 

Debt peaked in 2009:

Most of their debt is fixed rate, just under 30% of their 2013 debt was variable rate.

Footnote 30 mentions some contingent liabilities, for historic environmental liabilities - the company is defending a legal claim for warranties involving a third party indemnifying them for these liabilities.

Pension plan is over funded - first time I have seen this.  The assumptions look OK to me, but I could not find the expected rate of return on assets.  Their pension fund is roughly 40% bonds, 60% equities.

Altogether OK.  Interest payments are easily covered, and they wont have to issue shares to raise money.


This is the type of company I like: one which may have a sustainiable compeditive advantage and which regularly spits out operating cashflows.

The main risks are:
  • May be cyclical, we can expect maybe a 30% operating profit drop in a recession.
  • The moat is probably not so strong - this is a competitive industry.  If they take their eyes of the ball and start losing business (e.g.: through too much cost cutting) I would have not way of telling.  I can't even name their major competitors to compare their results.  Don't know their industry or anything about Europe.  I cannot monitor their progress.
Its long term growth rate over the last ten years (2004-2013) of operating profit has been ~5%.  Long term its a slow growth company.

Currently trading around 19X 2013 earnings.  1H14 earnings are up 10%, and there is conservatively a 20% understatement of earnings due to contract amortization.   If estimated FY14 operating earnings are 64.5p, then 15X operating earnings would be 967.5p.  12X earnings would be 774p.  Probably not comfortable at its current price, as we are nowhere near the economic cycle trough.  Not sure at what price I would buy - for now, just add this stock to my shopping list.