Compass points to the long term

Bovis Homes; Provalis

The BBC canteen, long-suffering butt of Terry Wogan's jibes, is under new management. Compass Group, the UK's largest firm of caterers, is taking charge, rebranding the canteen as Caffe Ritazza, and introducing its Ixxy's Bagels and Upper Crust outfits to the corridors of Television Centre and Broadcasting House. Traditional tea bars will be replaced with "convenience-led outlets". Auntie will be shocked.

But that's progress. A steady stream of businesses and public sector organisations in the UK have decided to abandon in-house catering and outsource. The trend has been lucrative for Compass and yesterday's news from the Beeb shows that it can continue to attract organic growth in a maturing market.

Compass is a tasty collection of businesses in contract catering, vending machines, train station and airport concessions, and motorway service stations. It now contains the foodservice businesses of the old Granada conglomerate. It effectively acquired these last year through a fiendishly complex set of deals that saw it merge with Granada before spinning off the media interests and disposing of the hotels.

Analysts hated the deal and Compass shares have never regained their previous rating, but that's all in the past. Now Compass leads a market growing in the mid-single digits and consolidating fast. Compass itself is outpacing the industry because its sheer size means it can negotiate great deals from suppliers. Since the major players account for only a quarter of the market, there are plenty of acquisition opportunities out there. Compass is sitting on a £1.5bn war chest, and has an enviable record in increasing value from such deals.

Compass has both visible earnings and growth potential. Catering contracts are typically for a number of years – yesterday's deal with Trillium, which manages the BBC's facilities, will bring in £150m over a decade – and the company is relatively insulated from the economic downturn. At its most recent trading update, Compass said it had seen only a limited impact as some customers laid off staff, while its hospital food and school dinners business carries on regardless.

Margins may come under pressure as the savings from the Granada deal are exhausted, but the risk is offset by opportunities overseas, where the outsourcing of catering is gathering momentum. ABN Amro expects earnings growth of 12 per cent next year, which justifies the current share price of 25 times 2002 earnings. The stock, up 3p to 513p, should be a core long-term holding.

Bovis Homes

Bovis Homes is a class act in the housebuilding sector. Yesterday it reassured nervous investors with news that reservations and visitor levels are ahead of last year and margins are safe. It also took analysts on a site visit to demonstrate its new construction methods.

Bovis achieves some of the best margins in the sector – 21.8 per cent at the interim stage – by clever land buying, operational efficiencies and product innovation. Since it was demerged from P&O in December 1997 at 200p, it has performed consistently well and it rightly enjoys a premium rating.

The company does not work in central London and mostly builds detached and town houses, selling for an average price of some £138,000. Innovations that continue to attract customers include large loft rooms and four-storey houses – providing room for hobbies and for people who work from home.

Bovis has prefabricated assembly methods now in trial. This will produce large sections of houses in factories, which are then assembled on-site. It will do this with traditional brick-and-block construction, rather than the timber frames used by rival Westbury. Although it is more expensive to pre-fabricate homes, it cuts on-site construction time by two-thirds.

Bovis shares closed down 1p at 317p yesterday, putting it on a forward multiple of seven and well off the year-high of 398.5p. Although the economy is heading downwards, the slow planning system ensures that there is always an under-supply of new homes. Hold for the long-term.

Provalis

Diabetes sufferers, of which there are 10 million in the United States alone, are a clued up lot, more than able to take control of monitoring their condition. Provalis, maker of a glucose test used to measure the long-term success and safety of a patient's diabetes treatment, got a couple of useful regulatory clearances in the US yesterday. The test was approved as safe and simple enough for home use by diabetics. A giant marketing opportunity has opened up, and Provalis shares leapt 4.5p to 16p as a result.

Provalis is a much less risky investment than most small drug and biotech companies. It has bought up a portfolio of medicines that are not quite exciting enough for the big pharmaceuticals companies to bother with, but which its 40-strong salesforce can push to UK doctors. That is bringing in cash to help pay for the development of its own diabetes products and pipeline of vaccines and diagnostic tests.

Beeson Gregory, the house broker, expects Provalis to break even in the second half of next year. After that there is scope for some impressive profits, assuming the company is able to use its new opportunity to market diabetes tests direct to patients and that there are no glitches with the start of volume production in the New Year. Worth a punt.