Michael Harrison's Outlook: The Compass is pointing nearer to the door

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The Independent Online

War, what is it good for? Edwin Starr once asked rhetorically. The soul singer obviously overlooked the mass catering industry entirely. If the question had been posed to Mike Bailey of Compass he would have replied that an army marches on its stomach. Unfortunately peace-keeping is not such hungry work and hence Compass's second profit warning.

War, what is it good for? Edwin Starr once asked rhetorically. The soul singer obviously overlooked the mass catering industry entirely. If the question had been posed to Mike Bailey of Compass he would have replied that an army marches on its stomach. Unfortunately peace-keeping is not such hungry work and hence Compass's second profit warning.

The company was the biggest faller in the Footsie yesterday after admitting that the switch from military catering contracts in Iraq to the lower margin business of feeding the peace-keepers would wipe some £15m from its profits this year. Add in a £9m hit to pay for the rationalisation of the group's back-office operations in the UK and it is easy to see why the market reacted by biting a large chunk off the share price.

This is Mr Bailey's second profit warning in six months. The first one last September caused so much indigestion among investors that the shares lost 25 per cent of their value in one day and have struggled to make up ground since.

That profits warning stemmed partly from the mismanagement of Compass's school meals contracts which have turned out not to be as lucrative as Mr Bailey thought. Jamie Oliver's success in carving out an extra £280m for the school meals service is not going to make much difference. In any event, the cash will go into improving the quality of the food, not fattening the bottom lines of mass caterers such as Compass.

In any event, what really spooked investors last September was Mr Bailey's admission that he was slimmer in the cash flow department than planned and putting on too much weight in the working capital area.

Yesterday, Mr Bailey was at pains to demonstrate that the two profit warnings were different, quantitatively and qualitatively. He has a point. The first raised basic questions about Compass's business model and whether the company is simply too big to manage effectively, with some 40,000 separate contracts around the globe. The second was about the difficulty of forecasting military revenues when it is hard to know how long US troops will be on war rations in Iraq.

But for all that, a profits warning is a profits warning and Mr Bailey is well on his way to proving the old adage that they always come in threes. A third strike and he will surely be out.

Interest rates

It's Gordon's Big Day today, the moment when the economy takes centre stage in Labour's pre-election campaign and the Chancellor gets to elbow Alan Milburn out of the way.

The Institute for Fiscal Studies might have rained on the Chancellor's parade somewhat by pointing out by average incomes fell last year for the first time in a decade thanks to his battery of back-door tax increases. But otherwise the weather forecast is not too bad.

Standard & Poor's, the ratings agency, has given the Good Housekeeping seal of approval to the UK's economic management and consumer confidence recorded a surprising upward tick.

There was another banker for Mr Brown to tuck away in his back pocket: the albeit remote prospect of an interest rate rise this side of polling day vanished along with the latest Nationwide house price index. With inflation well below its target of 2 per cent, retail spending very clearly in retreat and house prices recording their biggest monthly fall in a decade, it is a moot point whether rates will need to rise even after a May election.

The Bank of England has gone out of its way to argue that there is no direct correlation between what is happening in the housing market and the level of consumer spending. Whilst it might just have been correct in de-coupling the two on the way up, there seems little doubt that falling house prices and waning consumer spending, in particular retail spending, are marching hand in hand on the way down. To suggest otherwise is disingenuous. Yesterday's house price index was accompanied by Bank figures showing a very steep decline in mortgage equity withdrawal in the final quarter of last year. People borrow against the value of their property to finance big-ticket purchases such as new cars. On that basis, it is hard to see how the fall in house prices and the accompanying decline in the new car market could not be inextricably linked.

The two MPC members who have so far broken ranks and voted for a rate rise are those closest to the financial markets - the Bank's deputy governor Sir Andrew Large and its executive director Paul Tucker. If the oil price continues rising in the way that some such as Goldman Sachs believe it could, reaching $105 a barrel at the top of the range, then a pre-emptive rate increase will be hard to avoid. But the retail slowdown points strongly in the other direction. The Bank should leave well alone unless it wants to then cut rates again in short order.

Life after Equitable

When Equitable Life announced back in 2003 that it would pay Charles Thomson and Vanni Treves basic salaries between them of almost £500,000, policyholders who had lost thousands of pounds of savings were rightly indignant. But two years on, the remuneration of the troubled insurer's chief executive and chairman looks a little more justifiable.

Equitable is now on a more stable footing than it has been at any time since losing its disastrous dispute over guaranteed pensions in the House of Lords five years ago. Not only have Thomson and Treves found the cash to pay policyholders bigger bonuses, they also claim Equitable's finances have improved to such an extent that a sale of the company might be viable later this year.

While a vote of thanks from policyholders might be premature, it at least now appears that the threat of insolvency has faded after all the painful surgery of the past three years.

However, Equitable would be wise not to get carried away with its new-found confidence. Strategic goals such as a sale, or even a transformation of the investment fund into a vehicle that could once again venture into the stock market, remain some way off.

It's true the insurer's solvency has once again improved over the past 12 months, but only marginally. And worryingly, the list of concerns Equitable faces remains staggering. Any policyholder who dips into the section of the annual results headed "Contingent liabilities and uncertainties" will be confronted with a string of potential headaches.

Until unknowns such as a £4bn court case with former directors and auditors have been resolved, there is little prospect of a complete return to health for Equitable. Disputes with regulators and policyholders past and present also cloud the issue.

The outlook for the company is so unclear, it's difficult to imagine a buyer stepping in. And it would be a terrible shame if after bringing Equitable back from the brink, Messrs Thomson and Treves slipped back into the kind of complacency that brought the insurer to its knees in the first place.

m.harrison@independent.co.uk

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