Compass races north as market turns south
8th February 2018 12:51
by Graeme Evans from interactive investor
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As one of the five constituents of interactive investor's Consistent Winter Portfolio, it's pleasing to see catering giant finally reminding investors why it deserves such attention.
Shares in the company have struggled of late but were up more than 6% at one stage Thursday following an upgrade to forecasts after just one quarter of trading in its new financial year.
It said organic revenues for the three months to December 31 grew by an impressive 5.9%, driven by strong levels of new business wins and healthy contract retention levels.
Compass has been a consistently strong performer over many years, particularly during the winter months, although shares have been under pressure since last November. This reflects a number of factors, including a recovery in the pound and the knock-on effect of a profits warning by French rival Elior. In the same week, Compass warned that it expected growth and margin improvement will be weighted to the second half of 2018.
The company has also had to cope with the tragic death of chief executive Richard Cousins, who was killed along with members of his close family in a plane crash near Sydney on New Year's Eve. The accident happened just three months before Cousins was due to retire and hand over the reins to former finance director Dominic Blakemore.
Cousins joined Compass from plasterboard firm BPB in 2006 and was responsible for a seven-fold increase in the company's share price.
Such an impressive record is why Compass was named alongside , , and in our winter portfolio for the November to April period.
• Winter Portfolio 2017 - winners revealed!
The last time Compass fell during this six-month timeframe was 2007 when other corporates also struggled. The average return over the past 10 winters is 13.6%.
It's looking like a tough ask for Compass to match that average return this year, with shares still below their price of 1,646p at the start of November.
But the company has plenty of supporters who think that a return to the record high of 1,757p seen in June is achievable. Liberum has a price target of 1,850p, while JP Morgan Cazenove recently upgraded its estimate to 1,785p.
Their support comes with Compass appearing to be well-placed geographically and in terms of sector performance.
First quarter revenues in North America increased by 8.2%, with growth particularly strong in healthcare, vending and sports & leisure. In Europe, organic revenue growth of 2.1% was better than planned, due to good trading in UK business & industry and a favourable calendar in sports & leisure.
The company now expects to be above the middle of its target 4-6% organic growth range for the full year. An efficiency drive means that Compass also expects modest progress on margins in the financial year.
However, a recent strengthening of the pound will mean that foreign exchange translation would negatively impact 2017 revenues by £1.2 billion and operating profit by £97 million at current spot rates.
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