Investors’ Chronicle: Compass, Redcentric, Great Portland Estates

BUY: Compass (CPG)

Compass has reported stellar growth, but the market was unimpressed by its outlook for 2024, writes Jemma Slingo.

Contract caterer Compass achieved stellar growth in the year to September 30. Organic sales jumped by 19 per cent, while underlying operating profits shot up by 30 per cent to £2.1bn. The FTSE 100 group attributed its success to a combination of volume and pricing growth, which both sat at roughly 7 per cent. Operating leverage also helped to boost profit margins from 6.2 per cent to 6.8 per cent, successfully offsetting the mobilisation costs new projects inevitably incur.

Compass achieved underlying double-digit growth in North America and Europe, and demand was strong across all sectors. The business and industry division benefited from the continued return of workers to the office, for example, while a flurry of sporting fixtures boosted the leisure division. 

As well as keeping hold of old clients — Compass reported a client retention rate of 96.5 per cent — the caterer also mobilised net new business of 4.6 per cent, comfortably above its historic average of 3 per cent. It seems that plenty of organisations are still looking to outsource their culinary problems, therefore, as cost pressures persist.

Why, then, did Compass’s share price fall by 5 per cent in the immediate aftermath of its results? One answer relates to its outlook for full-year 2024. Management said volume growth started to normalise in the second half of 2023, and progress is due to slow down further next year, with underlying operating profits only expected to rise by 13 per cent. This will be delivered through “high single-digit” organic revenue growth and more progress on margins.

Meanwhile, underlying finance costs are expected to increase to $225mn (£180mn), up from £136mn this year (Compass is changing its reporting currency from sterling to US dollars, as about three-quarters of its underlying operating profit comes from North America). Over £1bn of borrowings now appear among Compass’s current assets, suggesting there will have to be plenty of refinancing to be done in the coming months, adding a level of uncertainty. 

Ultimately, however, we remain bullish about Compass’s prospects. Against a tough economic backdrop, it is growing its client base and widening its margins and, although its debt is likely to become more burdensome next year, the group remains very cash-generative. Its valuation is also fairly appealing: the caterer is trading on a forward price/earnings ratio of 20.7, compared with a five-year average of 24.4.

HOLD: Redcentric (RCN)

The IT services group has reported high levels of recurring revenue and good profit growth — but integration work is ongoing, writes Jemma Slingo.

It is tricky to assess Redcentric’s half-year performance due to the impact of some hefty acquisitions. The IT services group, which works with the likes of Howdens and Hays, made two purchases around the time it published its interim results last year. It has now restated its 2022 figures to reflect these acquisitions, causing past profits to turn into substantial losses. 

Based on today’s results, Redcentric’s growth has been encouraging. Total revenue is up by a third at £82mn, and more than 90 per cent of its sales recur, with customers tending to enter long-term contracts. Meanwhile, adjusted operating profit grew by 43 per cent in the period to £5.6mn.  

Redcentric admitted that comparing the numbers is “very difficult” though, given that last year’s figures don’t include full contributions from the Sungard and 4D Data Centre acquisitions. Helpfully, therefore, it also provides figures for the six months to March 31 2023 to compare with the latest numbers. Growth over these two periods was far more modest, with total revenue up just 2 per cent. However, the group did return to a statutory operating profit after reporting losses in the six months to March. 

Ultimately, Redcentric is still in a state of flux. There are lots of exceptional items flying about and capital expenditure is high — as is debt. Chief executive Peter Brotherton said the integration of the acquired businesses is “on track to be fully completed by the end of this financial year” but until then we remain on the sidelines. 

Redcentric’s electricity bills, which have become one of the group’s biggest cost items, are also worth keeping an eye on. Management said it had put “considerable effort and resources into reducing electricity volumes” and secured future electricity commodity prices at “competitive rates” for full-year 2024 and 2025. Over the longer term, however, this commodity exposure could add further uncertainty.

SELL: Great Portland Estates (GPE)

The London office landlord has yet to surge back to life in the way investors had hoped, writes Mitchell Labiak.

London offices continue to haemorrhage value due to high interest rates and questions around their role in the post-Covid-19 world. This is bad news for Great Portland Estates and its share price dropped 5 per cent on the day. The real estate investment trust (Reit) posted a deepening of pre-tax losses for the six months to September 30 due to a swingeing £220mn valuation drop. It comes after the company posted an £80.6mn fall in last year’s interims.

The effect on shareholder value has been profound. From March 31 2022 to September 30 this year, GPE’s EPRA net tangible assets (NTA) per share plummeted 22.2 per cent from 835p to 650p. It’s a poor performance, but it’s comparable to Land Securities and British Land whose EPRA NTA fell 16 per cent and 22.3 per cent over the same period. Landsec and British Land’s September 2022 interims captured the bulk of that value drop, meaning better news this year. For GPE, the reverse was true.

The bigger question for investors is whether GPE’s price has factored in this performance. On the one hand, GPE’s discount to net asset value (NAV) would suggest it has. On the other hand, it has a lower dividend yield than the larger duo, and consensus forecasts predict a drop in dividends in 2025 and 2026, suggesting the shares may not yet trade at fair value.

Not that GPE’s chief executive is keen on a comparison between his company and the LAND and BLND duo. He told Investors’ Chronicle that GPE is smaller, nimbler, and more focused on central London, particularly the West End. That may be true. But considering Savills is recording a 7.1 per cent vacancy rate and leasing activity 37 per cent below the 10-year average for the West End office market, that does not sound like a good thing, either.