Broker snap: Compass downgraded by UBS to 'neutral'

20th Feb 2013 10:04

UBS has downgraded its rating for contract caterer Compass Group from 'buy' to 'neutral', but has raised its forecasts for the company after accounting for foreign exchange changes.Due to the strength of the US dollar and euro, the broker has upgraded next year's forecasts (year ending September 2014) for earnings per share (EPS) by around 2.0%."This change is entirely currency translation related but we would note that Q1 organic sales growth, at almost 6.0%, was in excess of our FY'13 estimate (4.2%), though this was partly the timing of the ramp up of the Ascension contract [large contract with US healthcare group]," said analyst Jonathan Leinster.The target price for the shares has been raised from 770p to 790p.However, Leinster noted that the stock has risen around 23% over the past year against EPS growth of just 9.0%.He said: "We have previously based our investment case on cashflow growth and cash returns but we note in FY'13 that the share repurchase will be lower than FY'12 and the cashflow will be impacted by higher expected capex, the rationalisation in Southern Europe and payments into the pension fund. Therefore the re-rating of the stock is far more apparent in cashflow yield terms."In spite of the downgrade, shares were up 0.19% at 799.5p by 10:40 on Wednesday morning.BC