Analysts at the broker said despite the disappointing results for the first half of the year, in which the FTSE 100 catering group saw its pre-tax profits drop 4.7% to £792mln and margins shrink 10 basis points to 7.5%, they expected the second half to be stronger, “with 5% organic growth & margins re-expanding all resulting in 15% EPS [earnings per share] growth”.
Bernstein also forecast the return of a special dividend, which the firm did not pay out in its interim results, saying that “Compass will be set to pay another £1bn special dividend in May next year, less than 12 months away”.
“Compass has historically been a very solid compounder, but over the last 12 months this has paused on the back of concerns over the change in management, no cash return in 2018 and weakening US$ alongside it tracking of weakening consumer staples stocks; in 2017 FY EPS growth slowed to 5.7%.” the broker said.
“We see it set to re-join its historic compounding path with 10.5% EPS CAGR [compound annual growth rate] through 2022, 2.5% dividend yield and the chance of a 5% positive re-rating back to a 35% premium to the market” they added.
Bernstein also seemed relatively relaxed on inflation concerns: “Inflation will lead to higher costs (labour and food sourcing); however, that risk has largely played out in H1 and US margins stayed flat. Compass over a longer period has proved adept at mitigating/passing on inflation and Obamacare provides a good example of inflation driving more outsourcing.”
Analysts also upped their target price for the firm to 1,750p from 1,650p: “Compass remains the structural winner in an attractive market. We do not change our valuation approach, continuing to value Compass at a 35% premium (currently at 30%) but 2% higher EPS estimates and stronger market sees our TP increase to £17.50 (15% upside) and we upgrade to Outperform.”
In mid-morning trading Monday, Compass shares were up 2% at 1,538.5p.