Broker snap: Cash returns likely at Compass, UBS raises target

29th Jul 2011 10:14

UBS has reiterated its buy rating and raised its target price for catering giant Compass, saying that the investment case has now shifted to cash returns and cashflow growth.The broker now believes that share repurchases from next year are likely, given that management want to avoid a "lazy balance sheet". "Combined with a 50% dividend payout this means that cash returns to shareholders are estimated at 7%+ in FY'12, and almost 9% in FY'13. Combined with 9-11% [per annum] growth in free cash flow then Compass appears to offers mid- to high-teens total returns, assuming no de-rating in the valuation," UBS said.Furthermore, third quarter organic sales grew by 4.5%, above the broker's 3% estimate. Earnings per share forecast for the years ending September 2012 and 2013 are raised by 2% and 4%, respectively, based on higher assumed sales growth and a share buy-back programme.As such, the target price is upped from 635p to 660p.Shares were trading 0.8% higher at 582p at 10:12 on Friday morning.BC