Broker tips: Compass Group, Avon Protection, Darktrace

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The analysts of RBC Capital Markets raised its price target on a restaurant business Compass Group from 1,340.0p to 1,500.0p on Wednesday after the group’s “strong” first-half results earlier in the month.

RBC Capital said it chose to raise its 2022 and 2023 earnings per share estimates on the stock by 10% following the interim results, reflecting better organic growth and strong tailwinds in the stock market. changes.

However, although RBC admitted it had “underestimated the strength of outsourcing’s boost to revenue growth following the latest round of lockdowns”, the Canadian bank also remains concerned about “the ‘collapse in consumer disposable incomes’ and the corresponding deterioration in employment prospects in key markets. .

“CPG remains a much-loved name, especially among those looking at it from a travel and leisure industry perspective. However, despite increasing our discounted cash flow derived price target by 12% to 1,500 .0p to reflect free cash flow upgrades, we still see , trading at 27.0x estimated calendar year 2022 price/earnings and 21x value/earnings business before interest, taxes, depreciation and amortization, as expensive as other large-cap defensive growth names in the business services sector,” said the analysts, who reiterated their “underperforming” rating on the stock.

“We also continue to see a more attractive and significantly cheaper contract catering turnaround opportunity at Sodexo.”

The analysts of Berenberg slightly lowered their target price on the defense company Avon Protection from 1,040.0p to 1,015.0p each, indicating that the company was currently “stuck in no man’s land”.

Berenberg said Avon is only suitable for a “brave investor” willing to take on various short-term challenges in anticipation of potentially higher demand in the medium term.

The German bank said the first half was “a difficult period for the group”, with flat year-on-year sales and around 3% lower than the post-closing update, adjusted underlying profit down by 48%, adjusted earnings per share down 81%, net debt down to $56.6 million at 2.6x EBITDA as Avon buyout halted and R&D and capex investments being “significantly reduced”.

However, Berenberg noted that Avon’s closing backlog of $111.0 million provided “some visibility into the second half,” and added that margins should also be supported by the 3.0 to $4.0 million in cost savings over the period, with an additional $6.0 million. cost savings also planned for delivery in 2023.

“We now assume an EBIT margin of 5.5% for fiscal year 2022 (previously 6.5%) given the lower margin sales mix expected in the second half of the year alongside continued inflationary pressures. For fiscal year 2023 and 2024 , we are making modest changes to our estimates,” Berenberg said. .

“Granted, until there is greater earnings stability and reduced leverage, we will struggle to be more constructive. We have cut our EPS estimates by 19%/3%/3% for the financial years 2022/2023/2024 respectively and remain holders.”

Dark Trace was under the mark on Wednesday while JP Morgan reiterated its “underweight” rating on the cybersecurity company’s shares and cut the price target to 320.0p from 400.0p, saying reputational risk further clouded the investment case.

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

“With higher exposure to SME/mid-markets and the prospect of increased competition likely to challenge the company’s ability to generate profitable growth, we do not expect Darktrace’s downgrade to compared to his peer group is reduced.”

More recently, JPM said, the combination of reputational risks associated with ties to Autonomy and the excess stock held by employees and shareholders prior to the IPO further bolsters the bank’s view that Darktrace will continue to underperform.

He noted that shares slid 15% on May 18 following news 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 Forensic Investigation.

“Darktrace shares have since partially reversed the one-day loss, primarily due to the company’s response to press reports and share purchases by certain Darktrace executives (CEOs and CTOs).

“However, we believe this is unlikely to provide firm reassurance of the potential reputational risks associated with his historical ties to Autonomy.”

Reporting by Iain Gilbert and Michele Maatouk on Sharecast.com

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