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Press headlines & tips: Compass, Kingfisher, Diageo

Find out which shares today's quality papers are tipping
September 28, 2012

PRESS TIPS:

Compass, the world's largest catering company, has proved an impressive investment through the financial crisis, with the shares up almost 200 per cent from their 2008 lows, but even this most defensive of companies cannot escape the fallout from the Eurozone debt crisis. Compass has responding by saying it will shrink its European business to maintain profitability, but the unit is relatively small.

The group's trading update was very positive. Compass said that it expected organic revenue growth of 5.5 per cent for the full year ending September 30. This was a touch ahead of analysts' expectations following growth of 8 per cent in North America and 12 per cent in emerging markets. There was, however, negative like-for-like growth in some parts of Europe. The caterer also said it had a strong pipeline of potential new contracts. The shares certainly aren't cheap, trading on a 2013 earnings multiple of 14.9 times and yielding a prospective 3.5 per cent in 2013. However, they trade at a discount to French peer Sodexo, at 16.7 times. Compass's increase in its dividend over the last few years has also outpaced the wider market.

Management continues to deliver in tough times, the group's geographical footprint is impressive and the outsourcing trend is supportive. However, given the market backdrop, the shares are now a hold, The Telegraph's Questor team says (Last IC rating: Buy, 16 May).

It is entirely appropriate that Kingfisher's 1,000th store to open should be in Poland, because this is the only part of the retailer to be showing any growth, declares Tempus in The Times. A note from Numis Securities suggests that prospects for Kingfisher in the UK, where it also has the Screwfix chain, may be improving as it gains ground from rivals. It also has the advantage of the disappearance of Focus DIY in spring last year and the increasing concentration by another rival, Home Retail's Homebase, on home furnishings. Market forecasts suggest a sharp rebound in Kingfisher's profits, weather willing, from an expected £740m in the year to end-January to perhaps £820m in 2013-2014. This would put them on about 10.5 times earnings for that year. The shares have lost about 15 per cent of their value since April. Hardly a raging buy, Tempus concedes, but an interesting long-term punt (Last IC rating: Hold, 12 Sept).

Spirits giant Diageo confirmed this week that it is in talks with India's United Spirits regarding the UK-listed company potentially buying a stake in the group. A deal probably wouldn't be cheap - but it makes complete strategic sense for Diageo. Most Indians drink locally brewed products, because import tariffs on alcohol are spectacularly high, being in excess of 150 per cent. However, hopes are mounting that an EU-India free trade agreement can be signed soon - although talks on this matter have dragged on for four years amid disagreements on certain tariffs and visa issues. It is in the interests of both parties to get a trade deal signed as soon as possible.

The purchase would give Diageo a strong foothold into the Indian market, which has a complex, regulated distribution structure with inter-state taxes and acts as a strong barrier to entry. Diageo is significantly more profitable than United Spirits. Credit Suisse has calculated that United Spirits sells close to 120m cases of alcohol each year compared with Diageo's 157m, but earnings before interest, tax and amortisation (EBITA) equal to just 4 per cent of Diageo's. This implies Diageo would have plenty of scope to help boost profitability at the Indian group. The shares are trading on a June 2013 earnings multiple of 16.7 falling to 15 and yielding 2.8 per cent. Questor last recommended a buy on June 7 when Diageo shares were at £15.81. They are up 10 per cent from then and remain a buy, The Telegraph reports (Last IC rating: Buy, 23 Aug).

 

Business press headlines:

Spain has pushed through €40bn of fresh austerity measures in the teeth of recession, despite violent protests across the country and separatist crises in Catalonia and the Basque region that threaten to break the country apart. Premier Mariano Rajoy has frozen public pay in 2013 for the third year in a row. The agriculture ministry and culture expenses will be cut by 30 per cent and the defence bureaucracy by 15 per cent. It comes on top of a €62bn squeeze already in the pipeline. He brushed aside warnings that fiscal overkill - at a time when unemployment is already 25 per cent - could push the country into turmoil, saying he would listen only to the "silent majority" of responsible citizens. Bowing to pressure from Brussels, the government has agreed to an independent budget office and a clampdown on early retirement. Pensions will rise by 1 per cent, paid for by raiding the social security reserve fund. The closed professional guilds and old-boy networks dating back to the Franco era will, in theory, be shaken up. The plan was carefully crafted with the European Commission, which praised the measures as "concrete, ambitious and well-focused," The Telegraph reports.

The devastating effects of drought across the US farm belt were on display as estimates of annualised economic growth for the second quarter were revised down from 1.7 per cent to 1.3 per cent. A decline in farm inventories contributed 0.2 percentage points of the cut to growth reflecting the damage to crops in states such as Kansas and Missouri. The lower estimate confirms the weakness of the economy earlier in the year but does not suggest a broader loss of momentum, because the damage from the drought will not continue in future quarters. With the presidential campaign in full swing even a revision was enough to draw political attention. Mitt Romney compared US growth with that of large developing countries. He said Russia was expanding at 4 per cent and China at 7-8 per cent. "This is unacceptable," he said, the Financial Times reports.

Spanish energy giant Iberdrola is mulling the sale of a stake in its UK power grid, in the latest sign that new investors will be needed to fund the planned £200bn overhaul of the energy sector. ScottishPower Energy Networks, which analysts value at up to £5bn, owns electricity transmission pylons and cables in southern Scotland and distribution networks in southern Scotland, northern England and Wales, serving about 3.5m homes. It requires an estimated £8bn investment this decade to replace ageing cables and substations and to connect up and transport power from 11GW of new wind farms that are due to be built in Scotland. Sources with knowledge of the situation said Iberdrola - which is also planning £4bn investment in its ScottishPower generation business - was looking at selling a minority stake in the grid business as a means of funding the upgrade without increasing its debt, The Telegraph says.

Transocean, the world's largest offshore oil driller, has been served with a preliminary injunction in Brazil, forcing the company to stop operations in the country within 30 days over an oil spill last year. A federal court in Rio de Janeiro served the company with the ban on Thursday, which Transocean said it is "vigorously" trying to overturn. Last November, about 3,700 barrels of oil flooded into the Atlantic Ocean off Rio de Janeiro from an offshore oilfield operated by US oil company Chevron and which Transocean had been contracted to drill. The spill, which occurred when workers encountered unexpected pressure when digging a well, was followed by another small leak in March that is still being investigated, the Financial Times writes.

Steve Morgan, the chairman of Redrow, is on Friday expected to table a takeover bid for the house-builder he founded valuing the company at up to £629m. The offer, set to be pitched at 165p to 170p a share, is expected to be made to the board ahead of today's Takeover Panel deadline. The bid would represent an increase of between 9 per cent and 12 per cent to the 152p indicative offer Mr Morgan made for the company last month. It would also come at a 35 per cent premium to the undisturbed closing price for the house-builder and is a considerable increase on the balance sheet value of the company, were it to be marked to market. Mr Morgan, who already holds more than 40 per cent of Redrow, made the consortium approach via Bridgemere Securities, together with 14 per cent shareholder Tosca Fund and Penta Capital, according to The Telegraph.

Marks & Spencer is to create 1,000 jobs over the next year under plans to boost its online operations, the retailer announced today. The new roles will be at a 900,000 sq ft distribution centre in Castle Donington, Leicestershire, from where M&S expects to distribute two million clothing and home products a week. Around 100 people are already working at the site ahead of the centre's opening early next year, with the jobs figure set to rise over the course of the year. IT and logistics director Darrell Stein said: "Castle Donington is a key part of M&S's strategy for the future. This new distribution centre will help us deliver our goal of being a leading multi-channel retailer by 2015," The Independent reports.

Tesco is poised to announce its first profit fall in almost 20 years, as the problems highlighted by its January profit warning are laid bare. Clive Black, analyst at Shore Capital, forecasts a 12 per cent decline in Tesco's pre-tax profit, excluding property profits, to £1.52bn in the six months to August 25. He described the profit decline expected to be announced on Wednesday as "generational". Philip Dorgan, analyst at Panmure Gordon, and another long-term follower of Tesco, said it was the company's first profit decline since 1994, when earnings were hurt by Tesco changing its depreciation policy, the Financial Times explains.

Shares in technology group IndigoVision, which was at the centre of a bitter boardroom battle less than a year ago when its founder was ousted, soared to their highest level in almost 18 months yesterday after posting bumper profits. Chairman Hamish Grossart, who replaced former chief executive Oliver Vellacott with finance director Marcus Kneen in December, said that the progress made since had highlighted there had been "much that needed adjusting" at the Edinburgh-based firm. Grossart said a "tremendous amount" had already been achieved under Kneen's "energetic and effective leadership". He added: "These are excellent results from a business with the potential to be much larger." "Although change is not always easy, there is now a visible spring in the step of management worldwide as they see improvements being made that should unlock IndigoVision's potential." The group - which makes CCTV systems for airports, casinos, ports and other sites - posted an operating profit of £2.7m for the year to 31 July, an increase of 123 per cent compared with the previous year as revenues grew, The Scotsman reports.