Broker tips: Compass, Wolseley, Daisy

7th Dec 2010 13:09

Nomura foresees further medium-term growth from Compass Group as the contract caterer is set to benefit from its 2010 acquisitions.Nomura's forecast for 2011 earnings before interest and tax has been increased by 1-2% as Nomura incorporates the annualised contribution, equating to £10m, from Compass's current year acquisitions.Last week, the group announced its latest purchase with the acquisition of Aussie food service business Life's A Party Group for £14.1m, providing the opportunity for expansion in the education and leisure sectors.For the next five years, the consensus of compound annual growth rate (CAGR) for earnings per share (EPS) stands at 9%, reaching an EPS of 60p by 2016. However, when incorporating acquisitions Nomura predicts CAGR will likely reach 14% with an EPS of 78p by the period end.For now, the broker predicts a CAGR EPS of 11% for the period, with an estimated EPS of 68p in 2016. Analyst Simon Larkin says that Compass "has cyclical, structural and capital opportunities to drive further medium-term growth."The broker confirms a 'buy' rating along with a 690p target price.While Panmure Gordon notes a strong recent run in Wolseley shares, its preference remains elsewhere in the sector as the group continues to struggle with cost pressures.The plumbing supplies firm released "OK" first quarter results Tuesday, according to the broker, with trading profit up 39% at £159m generating a margin of 4.6% compared to 3.4%."Generally it looks as though demand is good with group like for like (LFL) revenue up 4% although the pricing backdrop remains competitive," says analyst Andy Brown.US markets put in a generally stronger performance growing 6-7% like-for-like for the period. The broker observes that while the US residential division and the repair, maintenance and improvement unit both improved, the commercial business remains subdued."Our caution on Wolseley has been driven by concern on the US housing and non-residential construction recovery, as well as preferring to play the sector through other stocks," says Brown.With the share price having rallied from its mid-year low, the broker is not inclined to change its 'sell' stance, and confirms a target price of 1,100p.Broker finnCap retains its negative stance on Daisy Group due to the high risk profile of the telecom and hosting services provider.Analyst Andrew Darley highlights the acquisitive nature of Daisy, saying it will bring a combination of integration challenges. These challenges include "maintaining revenue in acquired companies while cutting costs, all the while trying to maximise the cross-selling benefits of an expanded products set to a growing core customer base," says Darley.The broker expects the integration team to have their hands full "with such a barrage of acquisitions ... particularly the post period-end Spiritel and NEG transactions".While adjusted earnings before interest, tax, depreciation and amortisation was £16m and in line with expectations, the revenue of £120m for the first half was 10% below the broker's £133m forecast."The risks of a highly concentrated series of acquisitions should currently merit a greater discount to more sedate peers with greater performance visibility, and a dividend," says Darley.A 'sell' rating is maintained along with a target price of 85p.