Compass serves up 16% profit surge
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Your support makes all the difference.COMPASS, the contract catering group, continued its impressive run yesterday with a 16 per cent increase in full-year profits to pounds 159m and bullish predictions that it is well placed to withstand a downturn.
Reporting strong growth in like-for-like sales and margins, the company dismissed suggestions that canteen contracts could suffer in a prolonged recession.
Francis Mackay, the chief executive, said the contracting market expanded in economic downturns as companies want to achieve the 10 to 15 per cent cost saving that can been attained by not running staff canteens internally. Mr Mackay said that in the previous slump of the early 1990s, Compass grew its sales by more than 6 per cent a year.
Comments such as these have been heard before from the contracting industry, of course, but Compass has proved to be one of the stock market's most resilient performers in recent years. It has out-performed the market by over 60 per cent in the past 12 months and grown from nothing to a FTSE 100 stalwart in just 11 years.
John Beaumont, analyst at Merrill Lynch, said: "This is a solid growth company and there aren't too many of those around." Compass reckons it can achieve underlying sales growth of around 8 per cent in the coming year, with earnings growth of 15 to 20 per cent.
The group has secured new contracts with the British Army in Germany, Microsoft in Seattle (serving 30,000 employees at 23 sites) and 175 service stores in the German railway network.
Compass reckons its contract retention rate is over 90 per cent and that the only significant contract lost in the past year was that for Ascot racecourse, valued at pounds 4m. There is some scope to increase margins in continental Europe and the rest of the world, though they are unlikely to reach the UK's chunky 7.3 per cent.
Compass was the subject of takeover rumours earlier his year, with Rentokil- Initial thought to be the most likely predator. But the price moved away from Sir Clive Thompson, and Compass yesterday said it had "received no enquiries whatsoever".
On Merrill Lynch's current-year profit forecast of pounds 190m the shares, up 24p to 644p yesterday, trade on a forward rating of 32. This is expensive, but sector analyst John Beaumont says they still look a solid long-term hold. "The rating always looks full, but how many companies are going to deliver 15 to 20 per cent earnings growth next year? That is why you are paying a premium."
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