Compass Group has a big appetite for North America

picBuy, sell or hold: today’s best share tips

There comes a time when size and market share count. Compass Group is now so big in North America, which delivered 56 per cent of revenues at the halfway stage, that it can tailor its catering offering to individual sectors and even subsectors.

This means that it can offer a targeted service to schools, universities or whatever, while gaining the efficiencies available from shared IT systems and back office functions. Fresh work picked up, such as at the New Las Vegas Arena and Oracle Arena, drove an 8.3 per cent rise in North American revenues in the half-year to March 31, comfortably exceeding City expectations and lifting group revenues 5.8 per cent to £9.7 billion.

Yet the story at Compass most recently has been the downturn in its offshore and remote division and in Brazil, contract wins there being offset by general economic gloom. Plainly, there is less being dug out of the ground in western Australia and less oil being produced elsewhere, so there is a reduced need for catering facilities in such locations. Last July Compass said it was restructuring that commodities business and some emerging markets, which would hit profits in the last financial year and this. There was no growth in its rest-of-the-world business in the second quarter.

Against this, a positive was the recovery in Europe. A couple of years ago Compass decided to pull out of contracts where growth was stalling as workers were either laid off or were economising on food. The rebound in Spain and Portugal has been notable.

Compass should be able to grow organically by more than 5 per cent this year, even if margins remain flat, held back by those underperforming areas. There is, practically, not much further these can go from the 7.5 per cent seen at present. Growth will come from acquisitions, but the company remains cautious. Any money not spent on these will go back to investors: £144 million was spent on deals and £72 million on share buybacks in the first half.

The shares, down 11p at £12.51, have been strong performers and sell on 21 times’ earnings. This is about par for the shares historically and sounds high, but I would be inclined to take a long-term view.

Revenue £9.7bn
Dividend yield
Profit before tax
Half-way organic revenue growth 5.8%

WHY Though margins may have flattened, there is the potential from acquisitions, while restructuring benefits are not yet through

When you have a fifth of your business in Brazil, a country whose economy and political system are under severe strain, you have a problem. The depreciation of the real against the dollar, in which Experian reports, means that a respectable 5 per cent rise in revenues at constant exchange rates in the year to March 31 translates into a 4 per cent fall on a reported basis. To put it another way, currency movements clipped $137 million off earnings before interest and tax, which came in at $1.195 billion.

It is an ill wind, though. The rise in credit defaults in Brazil helped the world’s biggest provider of credit checks, a boost that the company describes as “countercyclical revenues”. Organic revenue growth in Latin America, mainly Brazil, was up by 7 per cent, ahead of currency effects. The United States was more mixed, with organic revenues 3 per cent better. People are borrowing there and Experian is expanding into new markets, so credit services is doing well. Changes to marketing services are taking effect, while consumer services, which allows the public to check their credit rating, is also being repositioned, though the $360 million purchase of CSID, an identity protection business and Experian’s biggest deal for years, will provide a boost when it completes.

The main support for the shares is the continuing buyback programme, another $400 million in the current financial year, as Experian uses its strong cash conversion. The shares sell on 20 times’ earnings, which does not suggest a lot to go for.

Revenue $4.55bn
Dividend yield
Profit before tax

WHY Buybacks will support shares, but rating looks high

JRP Group
JRP Group is the anonymous acronym behind the merger between Just Retirement and Partnership Assurance, which was completed after the end of the third quarter to March 31. Roll the two together before that and it was a quiet quarter, with new business sales down by 4 per cent while the Partnership side failed to acquire a single piece of new defined-benefit pension business.

This is not terribly surprising because there was a rush by corporates to offload their schemes before the end of the calendar year and a perceived rise in the cost of disposing of such schemes in advance of the new Insolvency II requirements. Such business is seen as the main rationale behind the merger of the two.

JRP shares, off a penny at 137p, are sitting at about 70 per cent of the expected embedded value, the main metric for such businesses. This is odd and, as one analyst pointed out, suggests that the company will struggle to acquire any new business and is in run-off, which is nonsense.

The £40 million of cost savings will kick in by next year, too. I would rate the shares a speculative “buy” on that basis.

Forecast profit before tax £126m
Dividend yield 2.5%

WHY The market seems to be underestimating potential

And finally…
The trading update from Melrose Industries is brief, to the point and more interesting for what it does not say. The company buys and improves engineering businesses and then sells them on and returns capital to investors. There is now only one left, Brush, which makes turbogenerators and is performing “satisfactorily” in difficult markets. Melrose says merely that it is still seeking that next acquisition; this rather implies that there is nothing imminent, although the company has surprised the market before.

Follow me on Twitter for updates @MartinWaller10

Add your Comment