Broker tips: Babcock, Compass, System1

JPM increased YE March 2024-27 earnings per shares estimates by around 3% per annum, leaving it 6%/11%/11%/8% above Bloomberg median consensus in these four years.

The bank said its higher forecasts are driven by three takeaways from the CMD. Firstly, the scope of infrastructure work in Babcock’s Devonport dockyard is greater than it expected. Secondly, it pointed to the fact that Babcock has around £100m of incremental revenue from building military land vehicles, and thirdly, it noted the "overall positive tone" of the presentations.

JPM, which rates Babcock at ‘overweight’, said it thinks the 9% decline in the share price was a "very strange" reaction to the CMD, leaving Babcock "meaningfully" undervalued versus European defence peers and providing "a very attractive" entry point for investors.

Shore Capital has reiterated its 'buy' rating on Compass Group after a first-quarter trading update from the catering giant on Thursday, saying trading is tracking ahead of full-year assumptions.

The company, which is targeting a high single-digit increase in organic revenues for the 12 months to 30 September 2024, said first-quarter organic sales were up 11.7%. Compass said like-for-like volumes were better than anticipated, especially in its Business & Industry division, which accounts for a third of group revenues.

"The 11.7% outturn for Q1 was comfortably above our full-year assumption for organic revenue growth of c.9%, implying modest upside risk to forecasts as the year progresses," Shore Capital said.

Compass completed net acquisitions of $350m in the period, having also announced the $600m acquisition of UK-based peer CH&CO in January, with M&A "likely to be a greater feature of the investment case than in recent years", the broker said. Compass also said it had completed $100m of the up to $500m share buyback, whilst also issuing a new €750m sustainable bond maturing 2031, with the proceeds used to refinance an existing €750m maturing his year.

"Based on current estimates, recent M&A and completion of the $500m share buyback, we would expect Compass to remain comfortably within the target net debt-to-EBITDA range of 1.0-1.5x, leaving plenty of headroom for further capital events," Shore Capital said.

Analysts at Canaccord Genuity reiterated their 'buy' rating and 450.0p target price on software firm System1 on Thursday following the group's capital markets day event earlier in the week.

Canaccord Genuity said Wednesday's capital markets day, in its view, reaffirmed "the impressive progress" that System1 has made since the launch of its strategic review.

"CEO James Gregory described how the refreshed go-to-market strategy has helped drive strong customer momentum for its data and data-led consultancy platform solutions, which enable its customers to predict and improve marketing effectiveness and optimise ROI," said Canaccord, which added that here, new and existing customer revenue was up 237% and 32% year-to-date, respectively.

Chief financial officer Chris Willford reiterated the group's full-year guidance, implying fourth-quarter sales of £7.8m, up 18% year-on-year, which the Canadian bank sees achievable, given run-rate performance, whilst adjusted underlying earnings consensus of £4.1m implied margin improvement of roughly 700 basis points, a trend which was expected to continue as the platform model drives operational gearing from the largely fixed cost base.

"System1's successful execution of strategy is evidenced, in our opinion, in the strengthening financial profile, which in turn has triggered four consecutive upgrades, most recently with the Q3 trading update. Despite this, the shares continue to trade at a >30% discount to peers on a CY24E EV/Sales of 1.2x, which we view to be unwarranted given its highly scalable growth trajectory. We reiterate our 450.0p target price, equivalent to a CY24E EV/Sales of 1.6x, which is in line with the peer group average," said Canaccord Genuity.