Investment Column: Compass is heading in the right direction
Entertainment One; Tribal
Friday 01 April 2011
Our view: Buy
Share price: 560.5p (+1.5p)
Compass, the world's largest food-service company, continued its strong momentum over the six months to the end of March.
The group, which operates in 55 countries, grew organic revenues – excluding acquisitions – by 5.5 per cent for the six months to 18 May, boosted by strong performances in the US, continental Europe and overseas. But the City was particularly pleased by Compass lifting its operating margin by 20 basis points in these three regions, and for the group as a whole, over the half year.
Growth in the US – the biggest market of Compass, which provides catering services across multiple industries, healthcare, education and high-profile sporting events – was driven by new business wins, a high level of customer retention and an uplift in like-for-like sales.
The group is also benefiting from buoyant emerging markets, notably in India, China and Latin America, with Brazil already delivering double-digit organic revenue growth. However, Compass found the going tough in some regions.
In particular, the challenging economic conditions in the UK hit underlying revenue volumes in its business and industry sectors, which remained in negative territory in the first half of the year.
However, for its wider UK operation, which provides catering at Wimbledon and the Grand National, organic revenues improved to be broadly flat, as was its underlying operating margin.
Unsurprisingly in Japan, Compass estimates it will suffer a £5m hit to its profits in the first half, following the recent tragic events.
On a global scale, Compass also warned that higher food inflation will continue into the second half, although it is mitigating this impact with improved buying, price increases and further efficiencies. Overall, we believe that Compass has a strong track record of overcoming external pressures, alongside boosting its own prospects with acquisitions.
While a forward-earnings multiple of 14 is not cheap, we think the group is a tasty long-term prospect for future investors, with analysts tipping substantial growth in its dividend yield.
Our view: Buy
Share price: 158p (-3p)
Like broody vampires who hang out with teenage girls? No? Well, Entertainment One does, as its distribution of the Twilight saga in the UK has proved very lucrative indeed. The independent film and television distribution company put out a short update yesterday without, it should be noted, a mention of its lucrative bloodsuckers. Instead it name-checked recent UK box office No 1 Gnomeo & Juliet, as well as the Bruce Willis vehicle RED, which has made an impact on DVD.
Management said it expected full-year earnings to be line with hopes, which is encouraging. The film arm has continued to perform strongly since the turn of the year, while the television business is growing. Other news included its Peppa Pig character's arrival in the US.
In short, the company has come out of recession strongly. The shares tumbled as low as 13.5p during the downturn but have stormed back since. Yesterday's update did not add a huge amount to the sum total of human knowledge but the business looks to be ploughing on nicely.
The forward-earnings multiple of 12.4 times means there could be more in the way of upside.
Our view: Buy
Share price: 36.75p (-2.25p)
Tribal is heavily exposed to the public sector which, on the face of it, hardly bodes well given the Government's austerity drive.
That said, the outsourcing group's full-year figures on Wednesday were in line with hopes.
The company also reported good progress in its international business, and in its education arm, which grew revenues, albeit with reduced operating profit margins.
The Government arm took a hit, but given the backdrop, that is not really surprising. The key question is whether or not the shares reflect the risks.
Having fallen by around 50 per cent since October, we think they do, so much so that they may be ignoring the potential upside from a possible sale of the company, which remains in an offer period, or from recent reports suggesting that Tribal may have received approaches for its education and healthcare arms.
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