Compass Group PLC

Compass Group PLC (LON: CPG) is a Chertsey, United Kingdom-based vending and catering service company, which provides great support and food services to millions of people around the globe. The company operate in 45 countries and work in 55,000 client location. The group has 600 thousand of colleagues and served 5.5 billion of meals per year to the clients. The company is divided into two segments, namely food services and support services; covered across three regions, namely: North America, Europe, and Rest of World (RoW).

Trading Update (as on 6^th February 2020)
The company released a trading update ahead of its AGM (Annual General Meetings). The company’s organic revenue increased by 5.3% in the three months to 31 December 2019, due to good retention rates, particularly in North America and strong levels of new business wins. In November 2019, the company announced the cost action programme. For the three months to 31^st December 2019, the organic revenue from North America surged by 7.5%, driven by robust growth in Business & Industry, Education, and Healthcare.  In the Europe region, the organic revenue was flat year-on-year. This region was impacted by a less favourable Sports & Leisure calendar and the anticipated volume softness in Industry & Business. But these headwinds were offset by a decent performance from the Eastern and Central European region and Turkey.  In Rest of World, the organic revenue surged by 4.7% supported by decent levels of growth in LATAM and Australia. Currency movements had a negative translation as compared with the same quarter last year, driven by an impact on revenues and profit in the current quarter. For the acquisition, the company has spent 40 million pounds in the first quarter. On 31 January 2020, the company has completed the acquisition with Fazer Food Services, for a preliminary cash consideration of around €420 million. The company also sold its Japanese Highways business, for a total consideration of 55 million pounds.

Share Price Performance

Daily Chart as at February-06-20, before the market closed (Source: Thomson Reuters)

Compass Group PLC shares were trading at GBX 1,949.50 the time of writing before the market close (at 1:44 PM GMT) on 6^th February 2020 and were up by 2.25% versus the previous day closing price. Stock 52 weeks High and Low are GBX 2,150/GBX 1,655.50. The group’s stock is reflecting the lower volatility as against the benchmark index based on the company’s beta of 0.77.

Conclusion
The steady growth is getting offset with an increased mobilisation cost and inflation prevailing in the UK and European markets.There are some principal risks and uncertainties which could impact the overall business of the company. Health and safety are very important in the food business; any discrepancies in that could affect the revenue and hamper the reputation of the company. Increase in the cost inflation could affect the profitability of the company. The pipeline of new contracts in North America is strong, and Rest of World is growing well, the company is excited about the significant structural growth opportunities globally. The company anticipate making additional progress with disposals throughout the current year. In the year start of 2020, the company is on-track. The company’s organic growth expects around the mid-point of the 4%-6% guidance range while continuing the robust margin. As per the longer-term scenario, the company stay excited about the substantial structural progress opportunities internationally, and the potential for further profit and revenue growth combined with further returns to investors.

On a CAGR basis, the company’s gross profit has grown from GBP 13,863 million in FY2016 to GBP 17,787 million in FY2019, giving approximately 8.66 per cent growth.

Based on the above rationale, we have given a "HOLD" recommendation at the closing price of GBX 1,906.50 (as on 5th February 2020).

Filtronic PLC

AIM-listed Filtronic PLC (LON: FTC) is a specialist RF (Radio Frequency) engineering company, which supplies, designs, and manufactures a high quality, innovative range of custom and standard filter, antenna and mmWave transceiver solutions that meet the needs of clients in market sectors ranging from mobile telecommunications network infrastructure to critical communications. The company is an SME B2B, which works from international locations in the USA and UK.

Financial Highlights (for the six months ended 30 November 2019)
In the first half of 2020, the company’s revenue decreased to £7.5 millionas compared with the corresponding period of the last year. The lower sales revenue was expected and resulted from the closing-out of the legacy filter product programmes. The adjusted EBITDA for the first half of 2019 stood at £0.6 million and remained the same from the same period last year. Adjusted operating profit reduced slightly to £0.3 million (H1 19: £0.4 million) as a consequence of an extensive recruitment and training programme of further manufacturing & test staff for the growth in mmWave and defence production volumes. The operating loss for the first half of 2020 stood at £0.5 millionversus an operating profit of £0.4 million in H1 FY19. Including IFRS16 lease liabilities, the net debt stood at £3.6 million in H1 FY20. The net cash outflow from operating activities stood at £2.8 million in H1 FY20.

Share Price Performance

Daily Chart as at February-06-20, before the market closed (Source: Thomson Reuters)

Filtronic PLC shares were trading at GBX 10.14 the time of writing before the market close (at 3:40 PM GMT) on 6^th February 2020 and were down by 8.89% versus the previous day closing price. Stock 52 weeks High and Low are GBX 11.85/GBX 6.15. The group’s stock is reflecting the higher volatility as against the benchmark index based on the company’s beta of 2.10.

Conclusion
The company has entered in the second half of 2020 with a decent order book of more than £10 million and a decent demand profile from the main clients. The Board of the company expects to meet EBITDA market anticipations for the full year.

The company has shown a decline in the financial performance for the first half of the financial year 2020. Both the top-line and the bottom-line performance have reduced for the period.As a provider or supplier of Telecommunications Equipment products, the Group is highly prone to economic and business risk factors. The Technology Hardware & Equipment industry outlook stays uncertain, mainly in the United Kingdom and in the United States. The company operates in a challenging environment which requires continuous investment, sometimes at the cost of profitability, to stay ahead of competitors. The company is facing emerging headwinds and cost pressures. The company also witnessed growth in order intake for the period.

Presently, the company is trading near the 52-week High, raising doubts at its upside potential at the current price level.The company’s trailing 12 months P/CF, P/E, and EV/EBITDA multiple are significantly higher as compared to the trailing 12 months industry multiple, reflecting overstretched valuations.

Based on the above rationale, we recommend investors to “AVOID” taking fresh positions in the stock at the closing price of GBX 11.13 (as on 5th February 2020).

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