With the reputation that Compass has for reliability and gradual, grinding compound growth, even the slightest slip can be taken amiss. Organic growth, the main measure the market looks at, grew by only 4 per cent in the fourth quarter, a slowdown from quarter three and the first half. Margins stabilised at 7.2 per cent, and there must be a question mark over how much further they can increase in the future, even if Compass is one of those businesses that can gain increasing benefits of scale as it wins new contracts.
Still the market reaction, sending the shares back 65p to £13.26, seems a little churlish. The company has made it clear that, after a 5 per cent rise in organic growth in the full year to the end of September, the first half of the current year will be somewhat subdued. This is all down to the timing of big contracts. The offshore and remote business, which serves oil rigs and mines and is understandably constrained, saw a 10 per cent decline in sales, but this is to be expected, in line with what its rival Sodexo of France said only the other day. Oil and gas activity is low, while big liquefied natural gas contracts such as Gorgon and Wheatstone in Australia, where Compass provides the catering, are coming to an end.
Still, North America, more than half of revenues, was up by 8 per cent and Europe, where Compass was required to pull back from unprofitable business a couple of years ago, is recovering well. Take out that offshore and remote business and the rest of the world grew by 3.6 per cent.
Compass, like other consolidators such as Bunzl, makes small infill acquisitions rather than big deals, which are probably impossible in an industry dominated by a few big players. It spent £180 million over the year, up from about £100 million the previous year, but this is dwarfed by free cashflow up 26 per cent to £908 million. Some of that cash will come back to investors in due course; the company paid a £1 billion special dividend in 2014 and has bought back shares in the past.
The shares have been weak of late, for no obvious reason, and sell on less than 18 times earnings. Any weakness on the part of such compounders is a buying opportunity.
My advice Buy
Why The market has taken the expected slowdown in growth badly, but there looks to be more ahead in the next financial year
Scapa Group
The market does not seem yet to have come to grips with the transformation that has taken place over the past few years at Scapa. Once a maker of low-margin adhesives, the company is now a global producer of sophisticated industrial materials that go into smartphones, while half the company produces medical products such as wound dressings. Less than 10 per cent of sales are in the UK.
So a set of halfway numbers that show good progress towards management’s target of double-digit trading margins at its industrial business and an indication that this year’s numbers will come in ahead of expectations was greeted with a 19p rise in the share price to 304¼p. Healthcare revenues were up by almost 12 per cent at constant currency rates, and margins there, despite investment and the acquisition of EuroMed, are still running at 14 per cent plus.
The industrial side has tended to underperform in the past but will see the benefit of the closure of a plant in Switzerland, which should push margins ahead of that 10 per cent target. Industrial saw a slight decline in revenues but the improvement in its performance is reflected in a rise in profits of a third even ahead of currency benefits.
Group pre-tax profits were up by almost 25 per cent to £12.1 million. This column tipped the shares a couple of years ago, and they have performed strongly, up from about £2 at the start of this year. They sell on about 29 times this year’s earnings and 22 times next year’s. That looks a full enough valuation for now.
My advice Avoid
Why The shares begin to look fully priced
Big Yellow Group
If you had to point to any company expected to suffer from the uncertainty ahead of Brexit, Big Yellow would be an obvious example. Its distinctive self-storage depots are in London and the southeast. They rely to a great extent on people moving house and on those renting and putting their goods in storage.
So Big Yellow warned yesterday that it would not be a surprise if activity levels and demand slowed over the next couple of years. Against this, there are supply constraints within its market, with a shortage of available properties. In addition, the company is pushing ahead with growing its occupancy rate to the levels seen before the economic downturn, and this grew to 79 per cent in the first half from 76.7 per cent last time.
This allows it to increase the average rent per square foot, and this rose by 3 per cent. Big Yellow is one of those specialist property companies that pays out a large chunk of income in dividends, and the interim payout is up by 12 per cent. The shares, up a penny at 669p, fell sharply after the referendum, therefore yield a bit more then 4 per cent. There is better income elsewhere in the sector, though.
My advice Avoid
Why Southeast’s housing market could be a constraint
And finally...
Gulf Marine Services, which came to the market in early 2014, has announced a significant new contract win, for an unnamed Middle Eastern customer. GMS supplies floating vessels to existing oil and gas and renewable energy assets; it has to be said that the float was one of the worst of that year, the shares having been sold by their private equity backers at 135p and closing last night at 46¼p. Blame the collapsing oil price, but its reliance on existing facilities provides more resilience than many in the oil services sector.
Follow me on Twitter for updates @MartinWaller10
