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Compass Group upgraded by Bernstein on expectation of special dividend return

Analysts at the broker said despite the disappointing results for the first half of the year, they expected the second half to be stronger with 15% EPS growth

Catering chef
The FTSE 100 catering group saw its pre-tax profits drop 4.7% in the first half

Compass Group PLC (LON:CPG) has been upgraded to ‘Outperform’ from ‘Market-Perform’ by New York-based broker Bernstein on the expected return of its special dividend next year.

Analysts at the broker said despite the disappointing results for the first half of the year, in which the FTSE 100 catering group saw its pre-tax profits drop 4.7% to £792mln and margins shrink 10 basis points to 7.5%, they expected the second half to be stronger, “with 5% organic growth & margins re-expanding all resulting in 15% EPS [earnings per share] growth”.

READ: Compass Group heads south as it serves up fall in half-year profits

Bernstein also forecast the return of a special dividend, which the firm did not pay out in its interim results, saying that “Compass will be set to pay another £1bn special dividend in May next year, less than 12 months away”.

“Compass has historically been a very solid compounder, but over the last 12 months this has paused on the back of concerns over the change in management, no cash return in 2018 and weakening US$ alongside it tracking of weakening consumer staples stocks; in 2017 FY EPS growth slowed to 5.7%.” the broker said.

“We see it set to re-join its historic compounding path with 10.5% EPS CAGR [compound annual growth rate] through 2022, 2.5% dividend yield and the chance of a 5% positive re-rating back to a 35% premium to the market” they added.

Bernstein also seemed relatively relaxed on inflation concerns: “Inflation will lead to higher costs (labour and food sourcing); however, that risk has largely played out in H1 and US margins stayed flat. Compass over a longer period has proved adept at mitigating/passing on inflation and Obamacare provides a good example of inflation driving more outsourcing.”

Analysts also upped their target price for the firm to 1,750p from 1,650p: “Compass remains the structural winner in an attractive market. We do not change our valuation approach, continuing to value Compass at a 35% premium (currently at 30%) but 2% higher EPS estimates and stronger market sees our TP increase to £17.50 (15% upside) and we upgrade to Outperform.”

In mid-morning trading Monday, Compass shares were up 2% at 1,538.5p.

Quick facts: Compass Group

Price: 1899.5 GBX

Market: LSE
Market Cap: £30.17 billion

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