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Compass among top Footsie gainers as RBC Capital points investors in its direction

RBC Capital has upgraded the shares to 'outperform' from 'sector perform' and lifted the target price to 1,750p from 1,530p
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Compass is a global market leader in food service, the broker said

Contract catering, services and property giant Compass (LON:CPG) provides investors with a rare combination of organic growth, improving margins and strong return of capital.

So says broker RBC Capital, which has hiked its stance on the shares to 'outperform' from 'sector perform' and lifted the target price to 1,750p from 1,530p (current price: 1,628p).

READ: Compass Group posts solid third-quarter organic revenue growth boosted by strong performance in North America

It's a quality business which has underperformed the FTSE 100 by 10% since June, and therefore it's a good time for traders to buy in.

Organic revenue growth accelerated to 5% in the third quarter, not including Easter, and analyst Andrew Brooke says he would expect a similar result in the fourth quarter.

"We believe Compass can grow organically, well ahead of GDP, and we see 4-6% organic revenue growth p.a. as sustainable," the analyst said in a note to clients.

He also sees further margin progress of 5-10 basis points per year over time, due to incremental efficiencies, especially around food and labour costs.

READ: Compass announces £1bn special dividend as it reports strong free cash flows in first half

"The focus on cash flow and returns, along with a strong balance sheet, should allow for both bolt-on deals and returns of cash to shareholders in the medium term," he adds.

That string balance sheet means the broker sees scope for £2.3bn (9% of market capital) of excess cash over the next three years - 17% including the ordinary dividend.

Compass shares are up 2.12% to 1,634p on the day.

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