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Broker tips: Compass Group, Avon Protection, Darktrace

By Iain Gilbert

Date: Wednesday 25 May 2022

Broker tips: Compass Group, Avon Protection, Darktrace

(Sharecast News) - Analysts at RBC Capital Markets raised their target price on foodservice company Compass Group from 1,340.0p to 1,500.0p on Wednesday following the group's "strong" first-half results earlier in the month.
RBC Capital stated that it had opted to raise both its 2022 and 2023 earnings per share estimates on the stock by 10% following the interim results, reflecting better organic growth and strong FX tailwinds.

However, although RBC admitted it had "underestimated the strength of the outsourcing fillip to revenue growth coming out of the last set of lockdowns", the Canadian bank also remains concerned about "collapsing consumer disposable incomes" and a corresponding deteriorating employment outlook in key markets.

"CPG remains a well-loved name, especially among those viewing it through a travel and leisure sector lens. However, despite raising our discounted cashflow-derived price target by 12% to 1,500.0p to reflect free cashflow upgrades, we still see the shares, trading on 27.0 times calendar year 2022 estimated price-to-earnings and 21x enterprise value/earnings before interest, tax, and amortisation, as expensive versus other large-cap defensive growth names in the business services sector," said the analysts, who reiterated their 'underperform' rating on the stock.

"We also continue to see a more interesting, significantly cheaper contract catering turnaround opportunity at Sodexo."

Analysts at Berenberg slightly lowered their target price on defence firm Avon Protection from 1,040.0p to 1,015.0p each, stating the company was currently "stuck in no man's land".

Berenberg said Avon was only suitable for a "brave investor" willing to look through various near-term challenges to the prospect of potentially higher mid-term demand.

The German bank said the first half was "a tough period for the group", with sales flat year-on-year and roughly 3% below the post-close update, adjusted underlying earnings falling by 48%, adjusted earnings per share dropping 81%, net debt rising to $56.6m to 2.6x EBITDA, Avon's buyback being halted, and both research and development and capex investment being "reduced meaningfully".

However, Berenberg noted that Avon's closing order book of $111.0m did provide "some visibility into H2", and added that margins should also be supported by the delivery of $3.0m-4.0m in cost savings in the period, with an additional $6.0m of cost savings also planned for delivery in 2023.

"We now assume a 5.5% EBIT margin for FY 2022 (previously 6.5%) given the lower margin mix of sales anticipated in H2 alongside continued inflationary pressures. For FY 2023 and FY 2024, we make modest tweaks to our estimates," said Berenberg.

"Certainly, until there is greater earnings stability and reduced leverage, we will struggle to be more constructive. We cut our EPS estimates by 19%/3%/3% for FY 2022/2023/2024 respectively and remain holders."

Darktrace was under the cosh on Wednesday as JPMorgan reiterated its 'underweight' rating on shares of the cybersecurity firm and slashed the price target to 320.0p from 400.0p, saying reputation risk has muddied the investment case further.

"While we believe that demand for cybersecurity solutions will remain robust despite the macro headwinds, investors are likely to favour high-quality companies with a sticky customer base, healthy free cash flow generation, and a clear path towards sustainable profitable growth," JPM said.

"With higher SMB/mid-market exposure and the prospect of higher competition potentially challenging the company's ability to deliver profitable growth, we do not expect Darktrace's discount relative to its peer group to narrow."

More recently, JPM said, the combination of reputational risks associated with links to Autonomy and the overhang from stock held by employees and pre-IPO shareholders, further supports the bank's view that Darktrace will continue to underperform.

It noted that the shares slid 15% on 18 May following press reports that Nicole Eagan - CSO and ex co-CEO - was named as 'part of a clique' responsible for misrepresenting the success of Autonomy and was previously a subject of a Department of Justice investigation.

"Darktrace shares have since partially reversed the single-day loss, primarily driven by the company's response to the press reports and share purchases by certain Darktrace executives (CEO and CTO).

"However, we believe that this is unlikely to firmly reassure on the potential reputational risks associated with its historical links to Autonomy."

Reporting by Iain Gilbert and Michele Maatouk at Sharecast.com


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