The Investment Column: Compass and cappuccino

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The Independent Online
NO WONDER Compass, the contract caterer, has attracted interest from potential bidders. It is growing at such a pace it was bound to end up on someone's takeover menu.

Turnover rose 17 per cent to top pounds 2bn in the six months to March and pre-tax profits jumped by a fifth to pounds 68m. Of course, a substantial part of this growth can be attributed to recent acquisitions. Even so, earnings per share, a fairer measure of underlying expansion, rose 13 per cent. That increase is an even more impressive 28 per cent if you strip out the distortion in the figures created by the rise in the value of the pound.

Compass is the first to admit that nobody can continue to grow at such a rate. There are several reasons, however, to suggest it may maintain its double-digit earnings growth.

First, and foremost, only a quarter of the pounds 100bn catering market is currently outsourced to third parties such as Compass. In other words, there is plenty to go for in a rapidly expanding market. And Compass is well placed to pick up customers who are increasingly hiring one caterer for their global or continental catering needs.

Secondly, Compass has only just started to reap the huge potential benefits from increased purchasing power, which should eventually help margins rise to as high a 8 per cent.

Returning to that takeover rumour, the likes of Sir Clive Thompson's Rentokil Initial are known to have eyed the group up. It is that, along with the group's continued expansion, that has caused the meteoric rise in its share price and pushed it into the FTSE 100. This, in turn, has pushed its value even higher as tracker funds have piled in.

Ironically, that rise has made a bid less likely. Compass is quite happy to hang on to its independence, and who can blame it given its growth prospects.

Analysts forecast current year profits of pounds 157m rising to pounds 188m next year, putting the shares, which rose another 25p to 1140p yesterday, on a prospective PE ratio of 34, then 29. Even after the sharp increase in the share price the group remains good long-term value.