Compass Group PLC (LON:CPG) got a boost on Thursday as Barclays raised its rating for the contract caterer to ‘overweight’ from ‘equal-weight’.
The global bank also hiked its target price for the FTSE 100-listed stock to 1,500p from 1,050p, with the shares currently trading at 1,317.50p, up 0.6% on Wednesday’s close.
READ: Compass encouraged by June performance, quarterly revenue tans 44%
In a note to clients, the Barclays analysts said: “We think investors are asking the following questions when evaluating the long-term investment case: 1) Can this business get back to prior peak sales/margins? 2) Can future growth rates resemble prior 4-6% p/a? 3) Can this be a high-quality compounder again?”
They added: “We address these questions here, and despite our still-cautious view on work from home (WFH) and delivery threats, we believe the answer to these is 'yes'.”
The analysts said: “We see Compass as well-positioned to: 1) flex costs/contracts sufficiently to recover margins even if volumes remain permanently impaired; 2) gain more share from smaller/weaker competitors; 3) benefit from more first-time outsourcing in healthcare/education even if we are cautious on B&I and 4) adapt the business to a digital/delivery model where relevant. We reflect these views as we build on our previous scenario work with a deep dive revenue/scenario analysis (EBIT raised 9%/7%/4% across 20/21/22E).”
They said their price target hike reflects forecast upgrades and a new valuation approach of 11.6x 2022e EV/EBITDA, which reflects both their enhanced confidence as well as a discount to prior levels for the structural challenges.
The analysts concluded: “This is a long-term call. Short term, the stock performance will likely be dominated by virus/vaccine/lockdown newsflow and we can't predict how that will look, but we do feel better about Compass' ability (more than its peers) to get back to its prior peak and again be a compounder.”