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 Update (14 May 2008)

The group’s recent half year results appeared to show that the recovery at Compass group remains on track. Organic revenues were up 5pc, operating profits rose 21pc to £322m, whilst the key profit margin increased by +0.6pc. Group progress has been aided by ongoing management initiatives – the Management And Performance programme (MAP) – along with earlier group downsizing. On the negative, rising food prices are still providing something of headwind, whilst the shares out-performance of the FTSE-100 index by 11.5pc over the last six months may have left the valuation already looking up with events.

Overall, whilst investors cannot afford to become complacent, given the challenging economic backdrop, Compass is still building on progress made to date. The shares retain defensive qualities in uncertain times, a share buy-back programme is ongoing and existing management have strong track records in sculpting both performance recoveries and eventual takeovers. On balance, market consensus opinion remains positive in tone.

HL Comment (28 November 2007)

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 has subsequently been sold, allowing management to focus on the core catering operations. The disposal raised more than investors had expected, coming in at £1.8 billion and has helped to reduce both borrowings and the staff pension scheme deficit. Furthermore, recent full year results (November 2007) continued to show progress being made, with pre-tax profits rising by 41.7pc to £442m, as management continued to engender a group concentration on profit margin growth as opposed to revenue expansion.

Acting for negative investor concerns, rising food prices constitute a significant proportion of costs, whilst currency volatility adds further uncertainty. On the positive, with management now delivering a recovery in profits, the shares retaining a defensive quality in uncertain times and both, in addition to management’s record for sculpting a takeover target, market consensus opinion currently denotes a cautiously favourable 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).