Broker tips: Compass, Meggitt, Volex

Jefferies downgraded shares of caterer Compass Group on Thursday to ‘hold’ from ‘buy’, noting stock has outperformed the Stoxx 600 by 20% plus during the recent rally on vaccine news.

The bank said that in order for it to maintain a ‘buy’ rating, its target price - currently 1,400p - would need to exceed 1,650p. This would be 27x FY23 forecast price-to-earnings, it said, which is well above the 9-24x through-the-cycle range.

The bank said it still reckons Compass has a de-risked balance sheet, is the best-in-class industry operator and should be larger at the next peak driven by market share, increased outsourcing penetration and M&A.

However, the shares now trade on 23x FY23 forecast earnings and, unless working from home headwinds are fully offset, circa 20x previous peak earnings.

Jefferies said that given an uncertain outlook, it is also useful to frame the stock’s valuation relative to the previous peak.

Citi downgraded aerospace engineer Meggitt to ‘neutral’ from ‘buy’ on Thursday after the share priced surged this week on the back of positive news about a Covid-19 vaccine being developed by Pfizer and BioNTech.

The bank, which has a 430p price target on Meggitt, said further upside was now limited.

"We maintain our recovery forecast of Meggitt’s civil aftermarket revenues getting back to 2019 levels by 2023, with business jets recovering first and wide bodies recovering last," it said.

"Based on this, we are 12-13% above 2022 and 2023 EBIT consensus estimates from our stronger margin recovery forecast."

Citi said that although consensus EBIT will need to come up, recommendation upgrades are likely more limited.

"We open a negative 30- day catalyst watch as we believe the shares will settle lower as the dust settles," it said.

Canaccord Genuity initiated coverage on manufacturer and power products provider Volex with a 382.0p target price and a 'buy' rating on Thursday, stating the group was compounding value to power accretive growth.

The analysts said Volex served "a well-diversified customer base" and was differentiated through scale, with a global manufacturing footprint that provides localised support and "a market-leading reputation" for quality.

Canaccord highlighted that Volex had completed a "transformational turnaround" that had restored profitability and cash generation, leaving the group well placed to exploit multiple levers of growth - targeting $650.0m of revenue and 10% operating margins within three years.

The Canadian bank added that Volex was supported by "a healthy balance sheet" and a new $70.0m revolving credit facility, with a $30.0m accordion, and expects value to be driven through an accretive buy and build strategy, enabling the firm to consolidate fragmented markets and move up the value chain.

Canaccord also noted that Thursday's €61.8m acquisition of DEKA, a leading manufacturer of power cords, fits in with this strategy.