Our view: Hold
Current price: 310.75p (-9.5p)
It is tough to get excited about catering, even if Compass Group is the FTSE 100's largest employer and a staple of the blue-chip index. Yesterday's encouraging full-year trading update once again failed to get investors' pulses going, and the 18.5 per cent rise in the share price over the past five years suggests that this is one stock the market has priced consistently well.
Compass supplies outsourced catering to a vast range of global private and public-sector customers. Recent negative issues such as corruption allegations regarding a UN contract and the cancellation of several military contracts appear to have been put behind the world's largest contract caterer.
Compass expects full-year results to come in at the top end of forecasts, despite the headwind caused by the weak US dollar. Organic revenue growth should come in 5 per cent ahead of 2006, and margins should improve by 60-70 basis points. Analysts are now looking for £440m of full-year pre-tax profits.
This is a good performance – not only in difficult currency conditions, but also considering food price inflation. Management has kept a tight hold on costs and the chief executive Richard Cousins, who joined the company just over a year ago when it was beset with problems, deserves much of the credit.
However, even taking into account the turnaround and hard work from management, the shares look expensive. Trading on more than 18 times forecast 2008 earnings is fine when investors are expecting above-average growth, but, regardless of the good work that has been done at Compass in the past year, growth is unlikely to exceed 5 per cent going forward. In the longer term, investors are not likely to have too many complaints, but in the shorter term the shares look fully priced relative to their prospects and are not propped up by a strong enough dividend to tempt income seekers. Hold.
Our view: Sell
Current price: 53p (-5.5p)
The omens have not been good for some time at the property and facilities services group Erinaceous. Takeover talks with four potential bidders kicked off in April but the share price began falling hard a long time before the talks were officially called off in August.
Investors were braced for bad news – after all, the stock had already fallen by more than 80 per cent since the start of the year. But a £3.9m interim loss, down from a profit of £12m in the first half of 2006, was far worse than expected. To compound the bad news, Erinaceous confirmed it has breached some banking covenants due to current poor trading, and although it has received a waiver from its banks that should be enough to send sensible investors straight to the exit.
It looks like the only way out for Erinaceous is to sell the family silver to cut borrowings. A plan is being put into place to dispose of property assets and developed land, but this is not a good time for a property firesale.
A management shake-out was also inevitable, and yesterday's announcement confirming that founder and chief executive Neil Bellis will move on should come as no surprise, although surely it is only a matter of time before he is also relieved of his new position as deputy executive chairman.
Somewhere underneath this mess there may be a decent company, but Erinaceous has been managed appallingly. Senior staff have been deserting and at least four lawsuits involving former employees should have had alarm bells ringing for a while.
Despite the fall in the share price, this is not a buying opportunity. By its own admission, Erinaceous may be unable to continue trading, and investors still in the stock should cut their losses.
Our view: Hold
Current price: 49.25p (+1p)
The high street has been a tough, competitive operating environment for a long time, and if interim results from Moss Bros, the formal wear hire and retail group, are anything to go by, it is not getting any easier.
The company, which operates 154 Moss Bros, Cecil Gee, Savoy Taylor's Guild and Hugo Boss stores in the UK, reported a pre-tax loss of £0.8m for the first half. That was expected and most of the losses were down to refurbishment of its stores, the results of which look more encouraging. First-half sales rose by 3 per cent across the group, but the 32 refurbished stores grew sales by double that amount.
Management believes Moss Bros is well positioned to outperform its rivals – but outperforming while everyone else is struggling does not guarantee profits, and the core brands Moss Bros runs, barring Hugo Boss, are not exactly at the cutting edge of fashion. Demand for formal hire is unlikely to grow rapidly, and retail competition remains intense.
That said, the company has a strong balance sheet with decent cash generation – a net cash balance of £10.6m should gain momentum going into the second half, with strong new collections and the continued roll-out of refurbished stores. However, it takes a brave investor to punt on a high-street name at the moment, and there is enough headwind for new investors to back off. Hold.Reuse content