Five ‘resilient’ stocks with recession appeal

Stocks in pest control and outsourcing have been backed to withstand the looming recession, but a City bank is taking a more cautious view on Compass and Bunzl.  

Recession planning by a City bank has focused on “quality and resilience” after Rentokil Initial (LSE:RTO) and Ashtead Group (LSE:AHT) were named among its top picks in the business and employment sector.

The recent note by analysts at Jefferies also retains “buy” ratings on outsourcers Serco (LSE:SRP) and MITIE Group (LSE:MTO) and Babcock International (LSE:BAB) but Bunzl (LSE:BNZL)and catering giant Compass Group (LSE:CPG) are downgraded to “hold” following strong runs for their respective FTSE 100-listed share prices.

The bank has updated its sector estimates for a recessionary scenario over 2023-24 and now sits 7-8% below the City consensus, having lowered its earnings per share forecasts by 10% on average. 

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Jefferies said: “We expect share prices will remain volatile but favour names with proven resilience, or where recession is largely priced in. We are wary of over-leverage and weak free cash flow stories.”

On Rentokil, the bank has increased its price target by 15p to 665p for an upside of 23% on last week’s share price. This is based on expectations for organic growth of 3.5% in 2023 and margins that flatten at 15%.

Jefferies added: “We expect Rentokil’s main pest control activities to remain resilient in a recessionary environment, hygiene to be more impacted, while French workwear is yet to fully recover post-Covid which may limit downside.”

Plant hire business Ashtead is backed with an improved price target of 5,500p after the bank predicted that US rental revenue growth will fall to 3-4% over 2023-24, based in part on expectations for US construction to see low-to-mid single digit declines.

Jefferies has made only minor changes to Babock’s growth and margin estimates for 2023-24 as it expects the recessionary headwinds to growth and margins to be largely offset by a more supportive outlook for defence and traction on management turnaround initiatives. Its buy rating and target price are unchanged at 450p, which compares with 332p today.

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Of the outsourcers in its coverage, Jefferies expects Serco and Mitie to be relatively resilient against weaker economic conditions. Serco, which has rallied from 120p in March to 180p today, has a 215p target while Mitie is seen at 99p compared with 72p this afternoon.

Among other “buy” recommendations, the bank is backing components supplier RS Group (LSE:RS1) to reach 1,300p after raising its price target on the former Electrocomponents business from 1,130p.

It said: “RS Group has historically been more cyclical than other distributors in our coverage, yet we forecast positive growth in the 2024 financial year,  driven by sustained market share gain and price inflation.”

The downgrade for Compass came shortly after the return of the catering company’s shares to where they were prior to the pandemic sell-off.

Jefferies believes the post-Covid structural tailwinds to the industry are now priced in, adding that Compass has already demonstrated its ability to pass through higher prices.

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The “hold” recommendation and target price of 2,000p comes after Jefferies lowered its 2023 revenue growth estimate to 7.3% from 10.6% and to 4.8% for 2024.

It added: “We expect the structural tailwinds of higher net new business, greater retention rates and continued pricing pass-through to offset the slowing volume growth.”

For Bunzl, Jefferies is worried about competition and margin pressures from higher fuel and labour costs although it notes the business model has been resilient in previous downturns.

Bunzl trades near the top end of its valuation range at 12 times earnings, another reason for the downgrade of the specialist distribution group with a target of 3,000p.