Broker tips: SThree, Compass Group

23rd Jul 2024 16:41

(Sharecast News) - Analysts at Berenberg lowered their target price on specialist staffing organisation SThree from 550.0p to 520.0p on Tuesday but said the group's contract focus offered resilience versus peers.

Berenberg said SThree's interim results were well trailed at its update a month ago, with few surprises in today's release. Management has confirmed that FY24 performance remains in line with current expectations.

Looking into FY25, however, Berenberg noted that continued macroeconomic pressures and subdued new business activity means that it now thinks it prudent to forecast both net fees and adjusted pre-tax profits to be flat year-on-year - equating to a approximately 12% downgrade for the latter for FY25.

"While today's downgrade is perhaps unsurprising given recent sector commentary on new placement activity, a circa £90.0m net-cash pile offers optionality, and the group's unique model and positioning in STEM end-markets leaves us encouraged for the future in the context of a 11.4x FY25 P/E (9.1x FY26 P/E)," said the German bank, which reiterated its 'buy' rating on the stock.

Shore Capital has reiterated its 'buy' rating for Compass Group after a report of strong third-quarter trading from the catering giant, saying it expects consensus forecasts to be revised higher following the update.

Analyst Greg Johnson labelled Tuesday's update as "robust", with the company now guiding to full-year organic revenue and operating profit growth above previous guidance of 10% and 15% respectively.

Organic revenues were up 10.3% year-on-year in the third quarter. "Although this reflects an expected modest slowdown on H1, it was comfortably stronger than our expectations of circa 9%," Johnson said.

On Shore Capital estimates, Compass's shares are trading at 22x estimated earnings for 2025, an enterprise value-to-EBITDA ratio of 11 and a free cash flow yield of 4%.

"Such metrics are consistent with historic trends, although we believe that the group can sustain elevated rates of growth through continued favourable outsourcing trends," Johnson said. "Our DCF derived fair value suggests circa £26 per share, although this could prove conservative given scope for continued upgrades and building excess capital on the balance sheet."