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RBC downgrades Compass as future direction becomes less clear

RBC upped its share price target as it raised forecasts but cut its recommendation to ‘sector perform’ from ‘outperform’ due to valuation and some doubts about the market's future
Longer term, RBC sees possible risks from trends for working at home, automation, slower outsourcing growth and increasing food delivery options

Shares in catering giant Compass Group PLC (LON:CPG) are not worth buying at the moment, analysts at RBC Capital Markets told clients on Friday as it downgraded its rating to 'sector perform' from 'outperform'.

The FTSE 100-listed group is still, the RBC analysts believe, “an excellent, focused and defensive business, with above-average growth and strong competitive positions”, as well as being one of the “quality, international, defensive” stocks that are in vogue at the moment.

READ: Compass points upwards as it upgrades full year growth forecasts following tasty first half

However, while there are operational and sector positives for Compass, RBC expects a slightly slower second half from the company and said margin progression was tough and key competitors could sort out their troubles and become more competitive over time.

Longer term, RBC sees possible risks from working at home and automation trends, potential for slower outsourcing growth and increasing food delivery options.

RBC upped its share price target for Compass to 1,800p from 1,750p as it nudged up forecasts on the back of strong current trading but cut its recommendation as the shares have outperformed the FTSE 100 index by 20% over the past 12 months.

“After the strong run and the stock at all-time relative highs, we no longer see enough upside in the shares to be positive,” the RBC analysts said.

Compass shares are among the more expensive in the outsourcing sector, it was noted, though they trade broadly in line with the other defensive stocks in line with RBC’s long-term valuation.

The analysts said they are negative on a number of the defensive names such as Intertek Group PLC (LON:ITRK) and Bunzl PLC (LON:BNZL) and their preferred sector plays are “now more skewed to the cyclical and value end of the sector”, such as DCC PLC (LON:DCC).

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