Compass Group plc Ordinary 10p (CPG)

Company overview

The Group's core activity is the provision of food and vending services on clients premises in over 60 countries. Such services are often provided using foodservice brands that Compass owns or franchises. The business is divided into four geographic divisions: UK, North America, Continental Europe and the rest of the world. Brands include Eurest, Scolarest, Chartwells, Medirest and Steampilicity.

HL Comment (29 September 2008)

Compass Group labels itself as the world’s leading food services company. A typical investor might expect a company involved with the provision of food services to be a relatively defensive investment, after all, we all need to eat no matter what the current economic climate. However, shares of Compass have unfortunately been anything but defensive over the course of the last few years, proving somewhat volatile in nature. A series of profit warnings blaming various items including lower than expected margins on contracts to deliver lunches to British schoolchildren, weak trading at certain European operations and a reduction of military operations in Iraq have all been detailed.

That said, a change of management in early summer 2006 appears to have seen the company take a turn for the better. The group’s travel concessions business was subsequently sold, allowing management to focus on the core catering operations. The group’s most recent trading update (29Sept08) suggested that the recovery at Compass group remains on track. For the full year, organic revenue growth is anticipated by management to be comfortably over 5pc and the group expects to see a further improvement in profit margins for the full year compared with last year. Furthermore, management noted that its efficiency programme had helped to deliver a good balance between net new contract wins and like-for-like growth and that it had managed to contain the impact of food cost inflation during the year to date.

Acting for negative investor considerations, a slowing global economy and the potential for slowing momentum for the company’s recovery plan need to be considered. In addition, elevated food prices remain a concern, whilst currency volatility adds further uncertainty. On the positive, management have continued to deliver a recovery in profits, the shares retain defensive qualities in uncertain times, whilst management’s record for sculpting a takeover target sits in the background. On balance, market consensus opinion is currently positive in tone.

All yield figures are variable and not guaranteed.

Fundamental Data

* Prior to 30th September 2005, figures were stated under UK Generally Accepted Accounting Principles (GAAP). Recent figures stated under International Financial Reporting Standards (IFRS).