Rising Wage Pressures And U.S. Expansion Costs Will Constrain Future Profitability

Catalysts

About ISS

ISS is a global facility services provider focused on integrated workplace solutions for large, multi-site customers.

What are the underlying business or industry changes driving this perspective?

• Heavy reliance on continued above-inflation price increases, particularly in high inflation markets like Turkey, risks squeezing customer budgets and triggering scope reductions or retenders. This could cap organic growth and pressure revenue resilience.
• Ambitious expansion in the U.S. built on upfront commercial and infrastructure investments without clear visibility on conversion timing creates a scenario where costs remain structurally elevated while contract wins and scale benefits lag. This may weigh on margins and earnings.
• Increasing customer focus on workplace quality, ESG and living wage commitments raises the structural cost base faster than ISS can offset through productivity. This potentially compresses net margins as wage floors and training spend outpace pricing power.
• Growing dependence on large, complex public and key account contracts such as DWP and cross-border expansions amplifies execution and ramp-up risk. Delays, lower than planned volumes or operational underperformance could erode profitability and free cash flow.
• A structural shift toward project and refurbishment work to support growth exposes ISS to more cyclical, discretionary spending patterns. A downturn in corporate capex or workplace investments could quickly drag on above-base revenue and operating leverage driven earnings.

Assumptions

This narrative explores a more pessimistic perspective on ISS compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming ISS's revenue will grow by 2.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.2% today to 3.4% in 3 years time.
• The bearish analysts expect earnings to reach DKK 3.1 billion (and earnings per share of DKK 20.15) by about December 2028, up from DKK 2.7 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as DKK3.6 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.5x on those 2028 earnings, down from 12.7x today. This future PE is lower than the current PE for the GB Commercial Services industry at 12.3x.
• The bearish analysts expect the number of shares outstanding to decline by 4.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.04%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• ISS is consistently delivering organic growth in line with expectations and reconfirming guidance of 4 to 6 percent organic growth. This suggests its integrated workplace model and commercial execution may support sustained revenue expansion rather than contraction, which could underpin resilient or growing earnings.
• The company is on a multi year margin recovery path, with first half 2025 margin up to 4.2 percent and guidance for a margin above 5 percent. This indicates structural efficiency gains and disciplined contract selection that could drive higher long term net margins and earnings.
• Strong free cash flow dynamics, including guidance for more than DKK 2.4 billion free cash flow and potential upside from a Deutsche Telekom payment, combined with deleveraging and an 11 percent payout yield via dividends and buybacks, point to robust capital returns that may support or lift the share price by enhancing earnings per share.
• Strategic investments in the U.S. platform, a healthy global pipeline, and large public contracts such as DWP in the U.K. that are expected to be margin accretive over time suggest that scale effects and cross border growth with existing customers could accelerate revenue and EBITDA growth rather than depress them.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for ISS is DKK150.0, which represents up to two standard deviations below the consensus price target of DKK210.2. This valuation is based on what can be assumed as the expectations of ISS's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of DKK250.0, and the most bearish reporting a price target of just DKK150.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be DKK91.8 billion, earnings will come to DKK3.1 billion, and it would be trading on a PE ratio of 8.5x, assuming you use a discount rate of 6.0%.
  
• Given the current share price of DKK211.2, the analyst price target of DKK150.0 is 40.8% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.