Broker tips: Compass Group, Barratt Developments

Analysts at RBC Capital Markets reiterated their 'outperform' rating on British contract foodservice Compass on Thursday following a strong European performance by the group in the first quarter of its trading year.

RBC said Compass has continued to deliver in Q1, noting that its most recent results were indeed a "reminder of the strength of the equity story".

Whilst the Canadian broker acknowledged that the derating of 'bond proxies' was a risk, RBC felt Compass was "one of the better-valued defensives in the sector" and it expects trading to remain strong, with balance sheet options.

RBC, which also reiterated its target price of 1750p on Compass, said the firm's outlook "remains positive", with full-year organic growth now expected to be "slightly above" the middle of 4-6% range with modest margin progression.

"Overall an excellent start to the year," said RBC.

"We remain at 'outperform' and see the valuation (19x 19E PE) as more than justified in the context of the sector."

RBC also noted that in a sector where diversification has "generally caused mishaps", it believes Compass' focus on a single specialism was a "key differentiator".

"The investment it has made in branding, sectorisation and procurement has meant it has grown faster, with higher margins than catering peers and especially those that have gone down the bundled services FM route," added RBC.

Elsewhere, Canaccord Genuity raised its target price for shares on Barratt Developments following the company's latest six-month financials.

In a research note sent to clients, the broker's Aynslet Lammin labelled the homebuilder's results "reassuring" and said the firm had relatively more earnings momentum upside, given existing room to 'beef-up' its margins and its target for volume growth of 3%-5% per year.

"The interim results were reassuring given the improvement seen in underlying margins from recent land buying and the benefits of the new house types," he said.

"Clearly macro risks remain given the political backdrop but it was reassuring to hear that 2019 had so far seen a reassuring sales rate as we enter the Spring selling season."

Lammin also hailed management's decision to extend its special dividend commitment of £175.0m for another year, to fiscal year 2020.

On Thursday, Barratt posted profits before tax of £408.0m, which was "well ahead" of expectations for profits of between £360.0-£365.0m.

He also described the balance sheet as "good" and highlighted the outfit's reduced exposure to Central London stock.

On the downside, he conceded that the sector had seen a sharp bounce recently, going on to say that he remained "cautious" on the macroeconomic front.

Lammin upped his target price for the shares from 570p to 600p while reiterating his 'buy' recommendation.