Bernstein downgrades Elis amid concerns over Investing.com’s acquisition of Vestis

Investing.com – In response to recent news about Elis Services (EPA:), a business services provider, analysts at Bernstein downgraded the stock from an “Outperform” rating to a “Perform” rating in a note issued on Wednesday, with a revised price target of €21.40, down from €27.60 previously.

The downgrade reflects growing concerns about Elis’ appetite for acquisitions, particularly after the announcement of its takeover bid for US company Vestis.

Although the acquisition of Vestis is of long-term strategic interest for Elis, due to the size and attractiveness of the US market, the report highlights several risks for investors.

These include uncertainties regarding the cumulative impact of the transaction, which could limit the company’s financial flexibility. In addition, Bernstein fears that it could take several years to realize the positive effects of Elis’s expertise on Vestis, similar to what happened with the Berendsen acquisition in the UK.

While noting that Elis posted solid revenue growth to €4.309bn in 2023, with €4.632bn forecast for 2024, Bernstein adjusted its organic growth estimates and now forecasts more moderate growth of 5, 5% in 2024, followed by 4.1% in 2025.

Despite the growth, they believe the impact of the Vestis acquisition could dilute Elis’ EBITDA margins by 300 basis points, with a potential dilutive effect on earnings per share. The combination of the two companies could generate consolidated revenues of €7 billion, but with a reduced EBITDA margin.

Although Elis is in a strong position with robust growth and high margins, the acquisition of Vestis carries significant short-term risks. The scale of the transaction could limit Elis’ financial flexibility and lead to margin dilution.