The good news is that Compass Group will return to break-even at a trading level in the fourth quarter following the reopening of units, an increase in volumes and “a relentless focus on efficiencies” (Dominic Walsh writes).
The bad news is that the world’s biggest catering group reported a 36 per cent decline in organic — or underlying — revenues in the final quarter, an improvement on the 44 per cent fall suffered in the third quarter but not as big a bounce-back as many had anticipated. For the full-year to the end of September, revenues fell by 19 per cent.
What’s more, the break-even figures exclude any contract impairments, which the company forecasts will force it to take a hit of about £100 million. Including impairments, its operating margin remains in negative territory.
Compass Group, once part of Grand Metropolitan, has for years been a class act, generating annual revenues last year of £25.2 billion. Before the pandemic, it employed 600,000 people in 45 countries serving 5.5 billion meals in work canteens, schools and universities, on oilrigs, in the defence sector and at sporting events.
The FTSE 100 company has been hit hard by coronavirus, however, forcing it to take drastic measures. It has raised £2 billion of new equity, lifting its total liquidity to £5 billion, scrapped the dividend, cut boardroom pay and furloughed staff. It has also laid off employees, although it is coy about how many.
In July The Times reported that it had made about 350 of its 60,000 UK employees redundant. In yesterday’s trading update it put considerable emphasis on efficiencies, suggesting there have been many more job losses since.
While sectors such as education, healthcare and factories have proved relatively resilient, its office canteens have been hit by home-working while its sports business has effectively been mothballed. The shutting of its sports business has probably had a limited impact on permanent employees, although the army of casual workers it normally hires for events like Wimbledon, Royal Ascot and Henley have not been needed this summer.
Compass said that “resizing costs” in the fourth quarter would amount to about £90 million, bringing the total for the year to £130 million. The terminology is a new one on me, but apparently these are reorganisation costs to reflect the slower pace of recovery in some parts of the business. Which sounds suspiciously like a euphemism for job cuts.
Regionally, North America, the group’s engine room of growth for many years, reported a 38 per cent fall in organic revenues, compared with a 45 per cent decline in the third quarter, helped by the reopening of schools and signs of recovery in its business and industry operations.
The decline in its European business improved from 53 per cent to 39 per cent after a continued good performance in healthcare and a “meaningful increase” in clients reopening in business and industry and education. Its sports and leisure sector remains “mostly closed”. Its rest of world business went from a fall in revenues of 21 per cent to down 18 per cent.
The company said it was pleased with its progress in the final quarter, and remained positive about the “significant market opportunity globally”, but there was a sting in the tail: “The pace at which our revenues and margins will recover remains unclear, especially given the possible increase in lockdown measures in the northern hemisphere through the winter months.” One facet of such difficult conditions that works in the group’s favour is that it tends to accelerate the pace of outsourcing.
ADVICE Hold
WHY Compass remains a class act with top management and will emerge strongly from the pandemic
3i Infrastructure
3i Infrastructure has been a little gem for those investors who clambered aboard when it floated 13 years ago (Patrick Hosking writes).
The FTSE 250 investment trust has produced a total shareholder return averaging 11.7 per cent a year. The trading statement yesterday suggests it has so far weathered the pandemic well.
It says its portfolio of infrastructure assets, which include fibre-optic networks and cold sterilisation units for healthcare, have been resilient. Even so, income for the six months to September 29 was £47 million, well down on the £57 million last time.
There are two immediate concerns for shareholders going forward. One is the forecast fall in power prices, which is likely to weaken revenues from its energy assets — businesses generating electricity from waste or solar, which account for 20 per cent of the portfolio.
The other is the collapse in aviation activity, which is bad news for TCR, a business that leases out moving staircases, plane tractors, baggage trolleys and other kit used by airlines and ground handling companies. TCR is 12 per cent of the portfolio.
Surprisingly, TCR was given a valuation uplift at the last valuation date of March 31, which was a time when airports were grinding to a complete halt. It’s hard to see how it can’t be hit this time, given the trials facing airlines. TCR’s five-year leases in theory give it some protection, but only if it actually gets paid.
Both those factors are bound to impinge on the next asset valuation, which will be announced in mid-November in respect of a valuation date of September 30.
The company and its manager, 3i, do their own valuations. There is no outside independent valuer.
The company says it is set fair to meet its dividend target of 9.8p this year, which will be just covered by profits. At the last valuation date of March 31, net assets per share were 254.5p.
The shares, up 1p, or 0.3 per cent, yesterday at 289½p, trade at a 13.5 per cent premium to that old net asset value number. That premium in recent years has bobbed around the 10 to 20 per cent mark.
ADVICE Hold
WHY Solid yield tempered by valuation uncertainty
