Seymour Pierce has turned less positive on Compass Group, despite the contract caterer's fourth quarter numbers coming in ahead of expectations.

"Compass reported organic revenue growth of over 6% in the quarter and of around 5.5% for the twelve month period to September 30th 2012 driven by good levels of new business wins and high contract retention rate. With the impact of acquisitions this is expected to result in constant currency growth of 8% which is in-line with our expectations," Seymour Pierce's Kevin Lapwood writes.

"Group margin improved slightly and, as a result operating profit is expected to be up by around 8%. This is in-line with our current estimate," Lapwood added.

According to the broker's calculations, the company's £0.5bn budget to buy back shares should be blown by the end of the year, at which point the questions becomes: "is there more to come?"

Although the net debt to equity ratio is still healthy, by the broker's reckoning, at less than 30%, the need to spend money to sort out Southern Europe may make the company more cautious over announcing a further buyback.

The group has announced a restructuring of its Southern Europe operations which should yield £95m of cost savings a year a couple of years down the line. The restructuring will lead to exceptional cash charge of £150m over two years and a non-cash exceptional charge of £195m.

The broker is making no change to its forecasts for the current financial year, which puts the shares on an earnings multiple of 15.5.

French quoted peer Sodexo, is on a prospective multiple of 19.2 for August 2012 falling to 17.4 in fiscal 2013 and currently yields of 2.7%, which is less than Compass's yield of 2.9%.

"We remain positive on Compass and stick with a 770p target price. However, further share progress may depend on more returns of capital, which could now be delayed. We move from Buy to ADD (Buy since 31 March 2009)," Lapwood concludes.

Panmure Gordon, however, is sticking with its "buy" recommendation, as its discounted cash-flow derived target price of 820p implies potential upside of around 15%.

Oriel Securities has also reiterated its "buy" recommendation, as has Espirito Santo Execution Noble but Numis Securities has downgraded the stock to "hold", while leaving its target price at 750p. Shore Capital is also a holder.


JH

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