The best indications are that Compass Group will be back to the sort of 4 per cent to 6 per cent organic growth rates that the caterer has tended to notch up in the past by the financial year starting in October. For now, the downturn in commodities markets that has caused a mild slowdown has been well enough signalled and investors will have to make do with another £1 billion special dividend, three years after the last one, which will arrive in July.
It is not a bad place to be and this column has championed Compass before for the reliability of the way it turns out revenue and margin increases year on year. This time the company, which gets almost all of its business from outside the UK, is getting the benefit of the lower pound, which boosted first-half reported revenue growth to the end of March to 20 per cent.
On an underlying basis the strictly comparable figure was a rise of 3.6 per cent, better than the 2.8 per cent recorded in the first quarter, and the second half will show a further improvement even if the year’s outcome may be at the lower end of the earlier average. Thereafter the decline in oil and commodities, as explorers and miners hauled back on work at the sort of offshore and remote locations Compass serves, will gradually drop out of the comparisons.
The growth rate of above 7 per cent in the US, the biggest division, looks unsustainable and will go back to a bit above 6 per cent. Europe is recovering well, with a marked improvement in the UK. The main damage from oil and commodities came in the rest of the world division, which gets a third of its business there, where a 5.1 per cent revenue decline would have been a 2.6 per cent increase without it.
The special dividend will merely cut the borrowing ratio to 1.5 times earnings by the financial year end and, all things being equal, should be repeated in the future. It is equivalent to 61p a share and is one reason the shares were recommended in November, when they had dipped to little more than £13.
Up 6p at £16.01 on yesterday’s figures, they sell on a less attractive forward multiple of more than 22 for this year. Investors should hang on for the special, while further long-term performance looks guaranteed.
My advice Buy
Why The rating is higher than it was but the long-term growth of 4 to 6 per cent is returning and the special dividend is worth having
IP Group
These markets have not been kind to investment vehicles such as IP Group that take on unproven technological innovations, often spun out of academe, and take them through to commercial production, often involving a stock market float. These are risk-on investments at the other end of the spectrum to reliable cash generators such as Compass Group, while the implosion at Allied Minds has done little for market sentiment.
IP has one other problem. Approaching 40 per cent of its portfolio is in one unquoted company, Oxford Nanopore, which is developing systems to analyse single molecules and is in patent litigation with a US rival, a claim the company dismisses as “frivolous”.
The value of IP’s portfolio rose by £38 million to £652 million in the four months to the end of April, the annual meeting heard. Stripping out new investments, most of this came from holdings in AIM-quoted companies such as Xeros, the bead maker for washing machines. The shares, up 4½p at 145p, sell on about a 12 per cent premium to net asset value, which is fairly low. Such investments can be rewarding long term, but caution looks appropriate.
My advice Avoid
Why Market sentiment is against such high-risk funds
Vesuvius
Shares in Vesuvius, formerly part of Cookson Group and a maker of products for steel plants and foundries, have done spectacularly well on the back of a sharp upsurge in steel production in the first quarter — 5.7 per cent, according to the World Steel Association — and increasing cost savings identified by the group.
That production rise has the look of a reversal of earlier destocking as the market recovered and will probably not be maintained. Indeed, forecasts suggest a 1 to 2 per cent rise in consumption for the year. The markets in which Vesuvius is particularly keen, India and China, are doing better than the global average at least.
As to cost cuts, the company has increased these by another £5 million a year to £40 million, with the main benefits to come through next year, though this is probably the end of the current round of efficiencies. Margins, running at just below 10 per cent in 2016, should therefore improve to 12 to 13 per cent, and one senses that Vesuvius is as well placed as it can be to weather whatever the steel market throws at it in future.
The smaller foundry business is experiencing mixed conditions: light vehicle production is going nowhere, especially in the US, but heavy truck and mining sales are improving from a low base.
The shares are up from about 350p in early November to 591p, ahead another 48p, on yesterday’s trading update. They therefore sell on about 16 times this year’s earnings, which unfortunately suggests the best of the rise is behind them for now.
My advice Avoid
Why Most of the good news seems to be in the price
And finally . . .
Empiric Student Property is one of those specialist property companies so often mentioned here for the assured and attractive income that they hand to investors. This one is more focused on the dividend yield rather than substantial capital gains, though the company is well invested to fund increasing property acquisitions, as student numbers show no signs of falling yet. The quarterly dividend has been declared at 1.525p; a 6.1p total for the year, therefore, suggests an annual yield of 5.4 per cent.
