The Investment Column: Compass beats expectations after sports hospitality boost

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The Independent Online
IT'S CHRISTMAS time, and investors are taking an interest in Compass, the caterer that can legitimately claim to feed the world. Compass's results habitually deliver fatter sales, profits and margins year-in, year-out. Still, contracts worth pounds 8m to provide corporate hospitality at golf's Ryder Cup and Rugby World Cup helped it to beat even the highest City forecasts yesterday.

Last year is unlikely to prove an exceptional one. Compass is already signed up to feed the Sydney Olympics and can list a raft of new contract wins, including deals with Ford, for whom it is supplying vending machines in its UK factories.

But chairman Francis Mackay has his sights set much higher. Compass has but 2.5 per cent of the pounds 200bn global catering market, and he's greedy for more. The overall market is growing at just 1 per cent, but particular sectors - such as universities and hospitals - are growing particularly strongly, Mr Mackay says. Still, these are small, so Compass's attack must be based either on acquisition or straightforward competitiveness.

Yesterday's results showed it powering ahead on both fronts. Organic growth was a healthy 8 per cent. Compass spent pounds 184m on acquisitions, and another pounds 19m since year end, on catering and vending machine businesses in Germany, Brazil and Australia. Margins rose from 5.1 to 5.3 per cent.

It adds up to a business set to deliver compound earnings growth of about 17 per cent in coming years on current forecasts. With the market as a whole expected to deliver mid-teens earnings growth next year, falling to 10 per cent growth thereafter, Compass's earnings potential alone would justify a rating about 70 per cent ahead of the market's.

Analysts expect pre-tax profits of pounds 229m and earnings of 24p this year, which suggests that the shares, when put on a 70 per cent premium to the market's multiple, are worth just a little more than their 797.5p close.

But Compass also merits a premium for its sheer predictability - most forecasts of two years ago of 1999 profits were just a few points amiss. Given the benign outlook for the global economy in 2000, the shares are good value.