UBS downgrades ISS to “neutral” on valuation concerns, raises target to DKr185

UBS Global Research downgraded ISS A/S to "neutral" from "buy," citing a balanced risk-reward after a 30%+ YTD share price increase and valuation alignment with peers at 10x FY26 estimated EV/EBITA. While ISS has shown strategic progress and margin improvement, UBS points to small contract wins and continued churn, forecasting organic growth at the lower end of ISS’s 4-6% target range; the 12-month price target was raised to DKr185 from DKr175, reflecting share buybacks, but B2B service spending pressures and uncertain arbitration outcomes related to Deutsche Telekom create potential headwinds.

Analysis

UBS Global Research has recalibrated its stance on ISS A/S, downgrading the stock to “neutral” from “buy” following a significant year-to-date share price appreciation exceeding 30%. This re-rating is primarily driven by a valuation that now aligns with peers at approximately 10 times the FY26 estimated EV/EBITA, suggesting limited further upside. While acknowledging ISS A/S's strategic and operational advancements, including the restoration of EBIT margins above 5% in FY24 and several new contract acquisitions, UBS notes these wins are predominantly small, contributing only about 0.1% to group revenue. Persistent contract churn, observed in recent quarterly trends, casts doubt on the potential for a meaningful acceleration in organic growth. Consequently, UBS projects average organic growth at approximately 4% for FY25-FY29, positioning it at the lower boundary of ISS's 4–6% target range. Despite the downgrade, UBS has increased its 12-month price target for ISS A/S to DKr185 from DKr175, attributing this to updated modeling that incorporates a substantial ongoing share buyback program. This buyback, alongside higher near-term organic growth, has led to an upward revision of adjusted EPS forecasts by 5% to 17% for FY25-FY27, with expectations of DKr16.73 in FY25, DKr19.19 in FY26, and DKr21.06 in FY27. However, adjusted EBITA is projected to see only modest growth of 0–2% over the same period, with near-term pricing benefits being partially offset by adverse foreign exchange movements and slightly lower mid-term margins. EBITA is forecast at DKr4.43 billion in FY25, growing to DKr4.83 billion by FY27, while EBITA margins are anticipated to remain stable at 5.1% through FY26 before a slight increase to 5.2% by FY28–29. External pressures, including constrained B2B service spending amid global policy uncertainty and cost inflation, pose challenges to ISS's ability to drive volume growth while maintaining its pricing stance. Furthermore, the positive impact of pricing pass-through from wage inflation, a recent growth driver, is expected to diminish beyond FY25. A potential DKr600 million upside exists from the disputed Deutsche Telekom contract, with an arbitration ruling anticipated by mid-July, though outcomes are inherently uncertain. Free cash flow is projected at DKr2.4 billion in FY25, with leverage expected to remain around 2x through FY27 before declining. Return on invested capital is forecast to improve from 15.2% in FY25 to 17.4% by FY29.

Key Decisions for Investors

• Investors should re-evaluate their positions in ISS A/S, considering the stock's substantial year-to-date appreciation and current valuation alignment with peers, which UBS suggests presents a more balanced risk-reward profile.
• Closely monitor ISS A/S's organic growth figures and contract churn rates in upcoming quarters to assess if the company can achieve the higher end of its 4-6% target range an_d mitigate concerns about growth acceleration.
• Track the outcome of the Deutsche Telekom arbitration, expected by mid-July, as a recovery of the alleged DKr600 million could provide a material, albeit uncertain, upside to financials.
• Consider the sustainability of margin improvements and earnings growth, particularly as the benefits from wage inflation pass-through are expected to fade beyond FY25 and B2B spending remains under pressure.