Investment Column: Diversity keeps Compass on firm footing

Unite; Roxi Petroleum

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The Independent Online

Our view: Buy

Share price: 520.5p (-9p)

The trading update from the catering giant Compass did not do much for its share price yesterday. But we would not read too much into the day's movements, as the stock market in general was under pressure.

If anything, the release was reassuring, with Compass saying that its expectations for the full year had remained unchanged after a good performance in the fourth quarter of its financial calendar. North America showed strength, with organic revenue growth driven by "good levels of new business wins across all sectors".

Continental Europe, on the other hand, looks less cheery, with Compass saying that although it had seen good levels of new business wins and an improvement in retention rates, the grim economic conditions were continuing to hit like-for-like volumes.

Full-year organic revenue growth in the region is therefore likely to come in at around 1 per cent, and the underlying operating margin is on track to improve. But after absorbing costs mainly stemming from an acquisition in the Netherlands, "the reported operating profit margin is expected to be marginally lower than last year".

Economic conditions are also difficult in the UK and Ireland and, again, Compass noted the impact on like-for-like volumes, which will contract modestly as a result. Acquisition and related costs are going to hit the operating margin in the region.

The rest of the world, however, appears to be booming. This, and the performance of North America, demonstrate the company's key strength in our view, namely the diversity of its operations. All in all, we were happy with the update. The news on Europe and the UK is no surprise, and the strong performance elsewhere is encouraging.

This is a resilient business with a strong balance sheet, so much so that some analysts are eyeing the possibility of a capital return to shareholders in the not-too-distant future. Moreover, on multiples of under 13 times forward earnings, Compass remains affordable. Keep buying.


Our view: Buy

Share price: 166.2p (-3.1p)

Unite took an axe to its senior management yesterday, promising savings of £2.5m annually after a £1.5m upfront cost has been absorbed.

Among casualties was the student accommodation group's chief operating officer of 10 years; he cost nearly £400,000 in 2010. Given that one analyst estimated that admin costs had mushroomed by 27 per cent over the past three years, this is welcome, if somewhat overdue.

The wider investment case focuses on Unite customers, who are being hit from two directions. Those in the UK will see fees trebling, while overseas students are finding it harder to obtain visas. Unite argues that the latter is down to the UK Border Agency targeting bogus colleges and those beneath university level.

On the ground, however, there are suggestions that this isn't always the case. It also believes that UK fee rises will lead student numbers to bottom out after rising sharply. We take a more pessimistic view.

That said, student numbers would need to fall very sharply to deal with the pronounced shortage of accommodation: there are 2.8 for every bed in London, 1.5 in the rest of the UK.

On the downside, Unite's debt is higher than we'd like, but the shares trade on a ridiculous discount of more than 50 per cent of their 2011 forecast net-asset value. Even with the potential challenges, that's too high.

Roxi Petroleum

Our view: Hold

Share price: 2.62p (-0.25p)

Roxi Petroleum, the Kazakhstan-focused oil prospector, took some much-needed steps to get its financial house in order yesterday. The company, which saw its stock spike by nearly 48 per cent earlier this month on errant talk that it had made a significant oil discovery, said that it needed to reduce short-term debt levels and to raise additional funds to continue developing its key 1,561 sq km BNG project, also in Kazakhstan.

Yesterday, it was able to announce that it had converted $9.4m (£6m) of existing debt, owed to company director Kuat Oraziman, into equity, in a deal that will give him control of the business by raising his stake from 46 per cent to 62.7 per cent.

The shares continued their recent descent last night, after peaking at nearly 4.5p on 9 September on the back of the rumours. But they remain a whisker above the 2.6p they were fetching before that, and yesterday's developments should steady the ship.