Gas prices surge in Europe, TUI reports strong recovery and Compass lifts revenue guidance

“Another day, another reminder of the energy crisis facing Europe as Ukraine stems the flow of Russian gas,” says AJ Bell Investment Director Russ Mould.

“Prices surged on this latest threat to supply which will concentrate European minds on the need to find alternative energy sources. In the meantime it only adds to the inflationary concerns dogging the markets.

“However, a rally for the tech-heavy Nasdaq index yesterday helped boost sentiment with investment trust Scottish Mortgage, a big investor in innovative growth companies, among the top FTSE 100 risers on Wednesday.

“Given the reaction to ITV’s full-year results, when its shares slumped heavily on scepticism about its new streaming platform and concerns about content costs, there will be a sigh of relief in the company’s boardroom that its first quarter update has been greeting with a shrug by investors rather than another sell-off.

“There was some reassurance on advertising, as revenue from this source came in ahead of expectations, though this is unlikely to fully alleviate fears about the future impact of a cost of living crisis on advertising spending. Speculation it might bid for Channel 4 went unaddressed.”

TUI

“We’re all going on a summer holiday if TUI is to be believed. Its bookings are picking up and the company has its eyes on a return to profit very soon. It’s a similar message to the one issued by International Consolidated Airlines in that the travel sector is slowly recovering.

“The big problem with TUI and many other travel companies is that they have large debts to pay down and costs are going up. So, while demand is picking up, getting their finances into better shape might take even longer.

“The war in Ukraine only appears to be having a limited impact on travel demand. When the war began, there were fears in the market that people would not want to travel around Eastern Europe in case the invasion spilled over into other countries. Subdued demand by TUI customers for holidays in Poland would suggest this ‘spill-over’ fear still exists, albeit principally confined to this country.

“While bookings in general are in recovery mode, there remains a big risk that momentum won’t be sustained given the pressures on consumers from the rising cost of living. We’ve already seen reports that big ticket retail items like sofa and electronic goods are suffering, so it makes sense to also suggest that holiday plans might be delayed once again if the costs keep going up.

“For those who haven’t already booked their summer break, the longer they leave it, the higher the potential not to go away at all given the direction of travel for inflation.

“TUI argues there is pent-up demand for a summer holiday and that is certainly true. However, some families may not feel comfortable digging into their savings to fund a week on the beach when they can see their monthly bills going up by a large amount.”

Compass

“Boring can be beautiful it seems. Catering giant Compass, that feeder of office workers, students and occupants of care homes around the world, is back at pre-Covid levels and perhaps more notably feeling sufficiently confident to lift revenue guidance and start buying back shares.

“There’s nothing innovative about Compass and what it does but in uncertain times, one certainty is that people will still need to be fed, and the company is very much at the top of the food chain in its industry.

“Compass’ scale creates significant barriers to entry and helps it to keep tight control on costs despite surging inflation in food prices.

“If it has the appetite it feels like there is still a very large amount of market share for Compass to snaffle up. Despite its leading position in the global food service market its overall share is only just in the double digits with plenty of smaller regional operators and in-house providers from whom it could take business.

“The current backdrop is encouraging more businesses and organisations which do their catering in-house to turn to Compass, driving new contract awards and helping to make up for any negative impact from the work from home trend.

“And it feels significant that Compass has just posted the highest ever level of client retention on record.”

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