LONDON (ShareCast) - With several trends set to benefit the European economy, Societe Generale's scrutiny of the contract catering sector picked out Elior as its preferred stock and saw Compass downgraded to a 'sell'.
"Given its high sensitivity to the economy, the contract catering industry should benefit from a decline in unemployment - as being observed in Spain - and an upturn in inflation, even if only mild."

Elior, the UK headquartered and French listed group, was initiated as a 'buy' by the broker for beig "best-placed among peers to benefit from an economic improvement in Europe" as it has 80% of revenues in the region and a strong presence in concession catering, a cyclical business that offers strong leverage potential.

Elior's EBIT margin could increase by 30 basis points (bps) per year, versus 5-10bps for Compass, the French bank estimated.

Compass, which has the largest US exposure among peers at 49% of revenues, is less well-placed to benefit from an economic improvement in the view of SocGen's analysts.

"Scope for improvement at Compass is now more limited in our view following the rationalisation measures already undertaken by the group."

With no significant return to shareholders forecast before 2016, SocGen thinks the shares are overpriced and moved its rating down from 'hold' with "more risks than opportunities" viewed. On a valuation of enterprise value (EV) over earnings before interest and tax (EBIT), Compass is trading at a 30% premium to its historical valuation and at a 17% premium to peers, analysts noted.

French rival Sodexo is also downgraded, to 'hold' from 'buy', as the ramp-up of new contracts is taking time and the group is proving slow to cut costs.

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