US Edition Compass
551½p -9
Questor says BUY
Compass, the world's largest food service company, has proved very resilient through the downturn. However, there has been weakness in the share price recently because of the gloomy market backdrop and as the group faces strong comparisons in the future. However, Questor thinks this has presented a buying opportunity.
The group operates under contract in 50 countries, across a broad range of public sector, commercial and industrial clients. Its main global rival is French group Sodexo.
The main point of note from last week's third-quarter update was the situation in Japan following the natural disasters earlier this year.
Like-for-like sales rose 4.5pc in the third quarter, down from the usual average of about 5.5pc. For the nine months organic growth is now about 5.35pc. However, excluding this slightly lower growth, the update was good.
The difficulties in Japan were offset by a strong performance in North America, where like-for-like sales rose 6.8pc and in the "rest of the world" region, which saw organic growth of 7.9pc. North America is the group's largest market, representing about 44pc of revenues.
The UK was disappointing, with like-for-likes down 1.5pc. Margins were flat in the quarter when the additional costs for Japan are included. For the second half of the year these Japan-related costs were put at £20m. Without Japan, there would have been an improvement in margins during the period of about 20 basis points.
Some brokers have notes out that the shares tend to show seasonal weakness over the summer months.
"[The] shares tend to underperform relative to FT-All Share in late summer from mid-July before picking up strongly in early November," Nigel Hicks, an analyst at Liberum Capital, wrote last week. "This should be seen as a period to build up weightings in an extremely defensive stock if investors see more difficult economic conditions for other companies in the next six to 12 months."
The comparatives are going to get more difficult after a strong recovery last year, but the group has reiterated guidance for its full-year profits – and it has a strong pipeline of potential new business.
Compass is very cash generative and some analysts expect the company could be virtually debt-free over the next year. However, this would be without any strategic acquisitions – and the group is always on the lookout for strategic buys. Net debt at the half-year stage was £671m.
Indeed, Compass unveiled another purchase yesterday in Turkey. It bought Obasan, which is a leading provider of delivered meals to businesses in and around Bursa and Istanbul. The company recently purchased 50pc of its Turkish joint venture, at which time it said that expanding the business in fast growing and emerging markets was a key focus. Emerging markets currently constitute about 20pc of revenues.
Compass has an attractive business model, good management and is cash generative. Growth will be driven by an increase in outsourcing, emerging markets and margin expansion.
The shares currently trade on 14.4 times 2011 forecast falling to 13 next year. The yield is 3.5pc.
Compass shares were first tipped at 306¼p on November 30, 2008. The shares are up 80pc compared with a FTSE 100 up 31pc, but they are a few pence below the level that Questor last said buy in April.
As a defensive play in turbulent times, Questor says buy.