RBC Capital downgrades Compass to ‘sector perform’

RBC Capital Markets downgraded Compass Group on Tuesday to ‘sector perform’ from ‘outperform’ as shares are now trading ahead of its unchanged price target of 2,400p.

"We continue to like CPG as a good all-weather stock with structural growth characteristics and a demonstrably defensive earnings profile," it said. "However, as shares are now trading ahead of both our unchanged PT and their 10-year adjusted price-to-earnings average, we see a slower burn from here and lower our rating."

RBC said that having risen 15% year-to-date, well ahead of the local FTSE 100 index and towards the high end of the Pan-Euro Business Services sector in total shareholder return terms, Compass now trades broadly in line with the price target.

"The calendarised P/E multiple of circa 26x for CY24 and circa 23x for CY25 puts it comfortably ahead of its 10-year 12-month rolling forward average P/E (ex lockdown-blighted 2020/21) of just under 21x," it said.

"We believe our (unchanged) DCF-derived PT of 2,400p gives CPG the benefit of the doubt for class-leading organic growth and margins, plus more generous medium-term and terminal growth assumptions. Pushing the PT higher at this point would, we think, be a contrivance."

RBC said the investment case is well understood and relative performance from here is more a call on the macro situation.

"Despite its huge scale, CPG is a relatively straightforward business to understand, with tried and tested management and performance (‘MAP’) processes driving dependable growth, and consequently a very sizeable investor fan club," it said.

"As the macro backdrop is, in our view, little clearer than it was at the start of the year, further outperformance on a 12-month view is arguably now more dependent on the market’s perception of CPG as something of a safe haven - less compelling, even if proved correct."