Investment Column: Compass shares heading north

Tougher times ahead for M&B; Baggeridge back on a firm footing
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The Independent Online

People are eating more and living longer, observes Michael Bailey. That's pretty good for Compass, the world's biggest catering company, where Mr Bailey is chief executive.

People are eating more and living longer, observes Michael Bailey. That's pretty good for Compass, the world's biggest catering company, where Mr Bailey is chief executive.

The company, reporting interim results, was full of confidence yesterday. While the half-year performance went down well with the City, the markets have treated Compass with some scepticism since it was demerged from Granada at the start of 2001.

The company provides food for workplace canteens in both the private and public sector, it has motorway service stations, some restaurants, plus food chains and concessions in airports and railway stations (where the audience is captive or semi-captive).

The group's operations are spread across the world, with 23 per cent of turnover coming from the UK, 32 per cent from North America. There was a 7 per cent rise in organic turnover to £5.8bn for the six months to 31 March, while underlying pre-tax profit was 11 per cent higher at £283m. Operating margins improved by 20 basis points to 5.9 per cent, which seems good for the sector.

While Compass is already the global market leader, it still only has 5 per cent of a £250bn market. So there is plenty of growth to go for, especially in markets such as China and Japan. Furthermore, margins in the UK, at 8.8 per cent, show that there is plenty of margin improvement possible in the rest of the world.

Compass shares were hit by a poorly received demerger from Granada, September 11 and stock market turbulence, which was compounded by the stock's move from the leisure to the support services sectors.

The City is now much more convinced by the Compass story, as shown in the more recent share price performance. At 353.25p, the shares trade on a forward multiple of 16 which, given the favourable economic environment, makes them a buy.

Tougher times ahead for M&B

Mitchells & Butlers' All Bar One and O'Neil's bars are still pulling in the punters. The pubs group yesterday said volumes were up 8 per cent over the half-year.

Pre-tax profits fell 5 per cent, but this was a quirk of its decision to reduce shareholder equity and increase debt. This increased its interest charge, but earnings per share rose 16 per cent and at an operating level, profits were up 2 per cent.

This is a marked contrast to other managed pubs estates such as JD Wetherspoon and Regent Inns, which are looking rather washed up on the hugely competitive high street. Sales in M&B's 2,000-strong estate were up more than 5 per cent across the group, and high street sales also rose. Its strong brands and focus on residential locations has increased its market share and kept margins steady.

M&B has also improved its food offering. In 1994, 70 per cent of M&B's sales were beer. Food and beer sales are now nearly on a par at about a third of sales; other drinks make up the rest. M&B's Harvester restaurants have become a staple of middle England's eating out experience.

But the next six months will be tough for M&B, as last year's scorching summer had the UK drinking all hours and comparisons may be disappointing. But the group has strong cash flow potential and at 255.25p, is still reasonable value. Settle in reasonable growth and dividend uplift potential. Hold.

Baggeridge back on a firm footing

The bricks market has made a comeback from the troubles of the late Eighties and Nineties.

Results yesterday from Baggeridge Brick, the country's number four player, were encouraging. For the half-year to 31 March pre-tax profits were up 74 per cent at £3.2m, while turnover was 11 per cent higher at £24.7m.

Brick sales and production were up on last year while national brick stocks were 17 per cent lower at the end of March than a year earlier.

What happened in the 1980s boom was that strong demand led to too much capacity being created in the industry, leading to a huge build-up of stocks and poor prices in the 1990s. Baggeridge said prices were now back to late 1980s levels. The demand outlook, longer term, is solid enough now that the Government has recognised that thousands more homes must be built each year.

The company's shares, at 154p, trade on a forward multiple of 12. With a well-balanced supply/demand situation these days, and margin improvement possible, the shares are a buy.

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