The Investmnet Column: Compass on course for millennium and beyond

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The Independent Online
Compass Group, the worldwide caterer, has clinched the catering contract at the Millennium Dome - and it's no coincidence that time is a key factor in Compass's business.

Catering contracts typically last at least 10 years, and it is not a service about which clients can quickly gather information. Setting up catering operations takes time; Compass spent five months preparing the simultaneous launch of facilities to feed 25,000 Microsoft staff at 22 sites.

In this industry companies are carried forward by reputation, and Compass's has been the driver behind a reported rise in half-year turnover of 18 per cent to pounds 2.4bn and a hike in pre-tax profits of 16.4 per cent to pounds 79m.

Yesterday the market pushed Compass 7.5p up to 641p after the company served up an impressive list of big-name contract wins and reminded the City that pounds 100bn worth of catering business in the US and Europe alone is ripe for outsourcing.

Compass is a global company focused on organic growth, a rare strategy amid mega-mergers and consolidation. It feeds the staff of Glaxo Wellcome, Smith-Kline Beecham and MCI WorldCom, among others. SKB recently awarded Compass the contract to feed its staff in Latin America on the basis of its service in Europe. Compass is clearly satisfying its customers.

On top of its hard-to-match reputation, Compass has a growing portfolio of catering brands - including Upper Crust, the station sandwich shop - which carry strong reputations in the education and healthcare as well as commercial sectors.

Compass's intangible assets are just what is needed to grow its sub-5 per cent market share in global catering. It has successfully implemented training schemes to help managers transfer skills across borders.

The only risk to Compass's reputation seems to be its making a dog's dinner of a national catering contract for a large multinational. But it has proved its mettle with such contracts; it does not promise more than it can deliver, and moves its best staff into new operations.

Compass has outperformed the market year-on-year, but has come off from a January high of 809.5p as investors switched to cyclicals. At 641p it is on a multiple of 32 times forecast earnings of 20p this year. Given the size of its potential market and its strategic strengths, investors should buy into the present weakness.