Jefferies downgrades Compass after outperformance

Jefferies downgraded shares of caterer Compass Group on Thursday to ‘hold’ from ‘buy’, noting stock has outperformed the Stoxx 600 by 20% plus during the recent rally on vaccine news.

The bank said that in order for it to maintain a ‘buy’ rating, its target price - currently 1,400p - would need to exceed 1,650p. This would be 27x FY23 forecast price-to-earnings, it said, which is well above the 9-24x through-the-cycle range.

The bank said it still reckons Compass has a de-risked balance sheet, is the best-in-class industry operator and should be larger at the next peak driven by market share, increased outsourcing penetration and M&A.

However, the shares now trade on 23x FY23 forecast earnings and, unless working from home headwinds are fully offset, circa 20x previous peak earnings.

Jefferies said that given an uncertain outlook, it is also useful to frame the stock’s valuation relative to the previous peak.

"Adjusted for the 12% equity issue, fully-taxed earnings per share was 74p in FY19," it said. "The March 2020 Fazer acquisition provides a 1.5% accretion tailwind but permanent scarring from working from home could be a potential circa 5% headwind."

At 1550 GMT, the shares were down 2% at 1,405.50p.