Morgan Stanley sounds 'positive' note on Compass Group

Analysts at Morgan Stanley sounded a 'positive' note on the outlook for Compass Group, telling clients that the catering services outfit was likely to beat its full-year guidance for organic sales growth.

On 3 February, the group guided towards sales growth of 20-25%, implying a sharp slowdown in the back half of the fiscal year.

But analyst Jaime Rollo noted how even during 2008-09 financial crisis, companies like Compass or rival Sodexo had posted organic sales growth in a range of 1.0% to -1.0%.

He also highlighted the trend towards outsourcing as the cost inflation and supply chain pressures resulting from Covid add to the challenges facing

Furthermore, 55-65% of contract caterers revenues came from a relatively defensive client base, including companies in Education, Healthcare, Energy and Defence.

As well, contract caterers had historically been able pass on price increases to their customers with many of their contracts being of the P&L or Cost-Plus type.

The analyst also cited the growing contribution of new contracts to Compass's sales and favourable exchange rate moves as reasons why he believed that the company would upgrade its own forecasts.

Rollo also argued that at 18 times the company's estimated earnings for 2023, the shares' price was undemanding, given that they had traded at 20 times earnings before the crisis.

"Given the company seems to be coming out of Covid stronger than it entered, with management guiding to at least 100bps higher sales growth from contract wins, plus a stronger balance sheet, we think it deserves a higher multiple.

"Our 1950p price target is based on 22xFY24,a 10% premium to its long run multiple, discounted back one year."

Rollo's recommendation for Compass Group's shares was unchanged at 'overweight'.