RBC initiates ISS at outperform, sees 18% annual EPS growth through 2028

RBC Capital Markets initiated coverage of Danish facilities services provider ISS A/S with an "outperform" rating and a price target of DKK345, citing opportunities for sustained organic growth, higher operating margins and strong cash generation.

The bank expects ISS to deliver adjusted earnings per share growth of around 18% annually between 2025 and 2028, driven by organic sales growth, operational efficiencies and share buybacks.

It said the company's strategy was generating stronger new contract wins and growth from existing customers, supporting its target of average organic sales growth above 5% over 2026-2028, compared with a historical average of 3.7% between 2000 and 2025.

RBC expects organic sales growth to become more balanced between pricing, volume gains and projects or additional work beyond existing service contracts. The bank forecasts average organic growth of 5.6% over 2026-2028, compared with the company's target of more than 5%.

ISS's third-quarter trading update provided further support for the outlook, with organic sales growth of 6.8%, around 20 basis points above consensus, according to RBC.

RBC highlighted ISS's plans to raise its adjusted operating margin to between 5.5% and 6% by 2028, from around 5.25% guided for 2026. It expects workforce management to be the main driver, supported by technology deployment, improved global and local processes and selective automation.

The company spends around 65% of revenue on employee costs and employs about 10,000 frontline managers responsible for managing wages. ISS estimates that its workforce management initiatives generated cumulative savings of around 28 million hours between 2023 and 2026 to date.

RBC also pointed to the group's capital discipline and strong cash conversion. Return on invested capital had recovered to 16% on a last-12-month basis, while negative working capital supported high returns on operating assets.

The bank expects ISS to generate sufficient cash to repurchase shares equivalent to close to 40% of its market capitalisation over the next five years, providing an important contribution to earnings growth.

RBC said key risks include weaker European economic conditions weighing on discretionary project work, labour shortages, global competition and longer-term uncertainty over the impact of artificial intelligence on demand for office-based facility services.

The DKK345 price target is based on a discounted cash flow valuation and implies a 2027 price-to-earnings multiple of 15 times.