Tuck into Compass now it has set a new course

Wembley cheap but risky; Systems Union could be worth a look

Forget finding north, Compass's recent share price has pointed stubbornly south. The catering giant has had a torrid year and investors wonder if Mike Bailey, chief executive, bit off more than he could chew with the food service businesses of the old Granada conglomerate. While investors appeared to digest the messy merger in February 2001, they have since been pained by the lack of returns.

Yet a glance at the group's recipe for long-term growth suggests it offers plenty more nourishment. It may be the world's biggest catering company, but Compass, which spans Moto motorway service stations to Harry Ramsden's fish 'n' chips, has just 4 per cent of the global market, worth some £250bn. Which leaves 96 per cent for the company to play for. After a flurry of acquisitions, Compass now intends to focus on growing organically. It is targeting 6 to 9 per cent underlying growth and has targets for its operating margins, too.

Sceptics worry that Compass, which served up a 7 per cent increase in like-for-like sales at its interims in May, is sacrificing margin gains for sales by bidding unsustainably low sums to win contracts. They also quibble that margin improvements delivered to date only really reflect cost-savings from the Granada deal. The group also has a disappointing record on returns on capital and poor cashflows.

The pledge to focus on growth from winning new business – by persuading the likes of schools and office canteens to let Compass meet their food needs – rather than buying businesses should improve the group's return on capital. Similarly, respite from the financial drain of revamping its Little Chef roadside caffs and Travelodge hotels once they are sold later this year should help its capacity to convert profits to cash.

Another factor to have sent the shares off course was its shift from the leisure sector of the stock market, where it towered over its peers, to support services, where it joined the likes of Securitas and Capita. The company took its support services analysts for an Ixxy's bagel and a tour of its other London outlets yesterday to get them up to speed with the company.

With Compass outperforming the competition, its shares look tasty.

Wembley cheap but risky

Are slot machines evil? It is a pertinent question for Wembley shareholders, since the company is asking legislators in Rhode Island in the US to allow it an extra 1,300 one-armed bandits in its casino complex in the state. In election year, it is a question for local politicians, too, and they may prefer not to choose between the vocal moralists among their constituents and Wembley Plc, whose betting tax is the third-largest contributor to state coffers.

It doesn't pay for a company to be dependent on politicians, but Wembley's profits in the US are highly regulated, down to the cents-in-the-dollar cut of income that Wembley can keep from the slots. Rhode Island has decided to take progressively more for itself over the next three years, to help plug a budget deficit. Now more than ever, Wembley needs those extra slot machines to sustain itself as a growth company.

Wembley severed its ties with north London this month with sale of Wembley Arena and is now a focused gaming company, but it faces several challenges. It is being investigated over bribery allegations in the US and in the UK it had to scrap an ambitious interactive greyhound racing channel. Called 24dogs, it went to the dogs back in May, and there was a £2.3m provision to cover its closure in interim results yesterday. That and other one-off losses sent pre-tax profits down 50 per cent to £8.2m, despite strong growth from the US slots.

The greyhound tracks in the UK are proving a moneyspinner as they prove a popular venue for corporate entertaining in these straitened financial times. They should also grow strongly long-term as the UK relaxes its gambling rules to allow much wider betting and entertainment activities at the sites.

Wembley's shares, up 23.5p to 668.5p, are cheap but risky. The likelihood is it will get the extra slot machines, but shareholders are unlikely to hit the jackpot before then.

Systems Union could be worth a look

Private investors who bolted into the Bob Morton stable of software companies during the dot.com bubble are still nursing heavy losses. Choosy new investors may be luckier.

Mr Morton, a "serial chairman", has had his work cut out with Systems Union. Once called Freecom.net, an e-commerce company, the group burnt through its cash and botched a merger with a UK rival, Oneview. That deal had to be renegotiated and the company's other acquisitions turned around, but the group looks to be if not out of intensive care, at least stable.

Mr Morton and his chief executive, Paul Coleman, were able to boast pre-tax profits up from £679,000m in the first half of 2001 to £1.7m this time. These were the fourth set of half-yearly accounts to have shown an improvement in underlying earnings, after Mr Coleman took an axe to costs.

The reason the share price doesn't reflect this is because the trading outlook remains challenging. Business spending on IT – such as the accountacy, payroll and other financial software in Systems Union's product portfolio – remains depressed. And the mighty Microsoft has also recently entered the accountacy software market.

SunSystems and Pegasus, the Systems Union brands, are winning new clients and pushing through price rises for maintenance work. The group still has a pot of £6.3m of its own shares (which were handed back by Oneview) to be used as acquisition currency. It is also set to agree a capital restructuring that will allow it to start paying a dividend. At 63.5p, on 14 times this year's earnings, it is worth a look.