More on Compass
Compass
Contract caterer and motorway service station operator Compass has a good track record of growth which faltered in the second half of 2004. Compass’s recent problems included:
- Costs incurred in switching work away from a distributor in “financial difficulties”
- Start-up costs incurred on new contracts
- Poor performance in continental Europe
- Low margins on education authority contracts in the UK
The first two are clearly one-offs, and the second can, even more positively, be regarded as an investment. The lower volumes and margins Compass’s problems in continental Europe may also be a one-off - but it may well be the first manifestation of long term pressures on margins. Low margins in education are unlikely to reverse.
The result of this has been a 2.8% drop in Compass’ operating profits in the second half of the 2004 financial year despite 7% growth in LFL turnover.
The rest of Compass is maintaining margins but with problems in both the UK (26% of revenues) and continental Europe (44% of revenues) we can expect at the least expect that margins will remain lower into the medium term (possibly into the long term) and that the market will remain sceptical about Compass for some time which means that a re-rating to previous levels looks unlikely.
At 260p Compass shares are on a prospective PE of 12× and a 3.9% yield. Compass has been recovering slowly since the sharp drop in price when the problems discussed above were disclosed - we feel the market over-reacted initially. Growth, while not likely to be spectacular, is sustainable however Compass has disappointed the market badly enough for sentiment to be likely to be held back for some time to come.
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