Calling time on Compass

A third-quarter trading update from Compass demonstrated further progress from the catering group, with progress on both the sales front and operationally. Organic revenue growth accelerated from 0.4 per cent in the first half and, with strong trading momentum so far in the final quarter, it's expected to hit 3 per cent over the full year, thanks to strong growth in new business in North America, Australia and Brazil. Acquisitions will add a percentage point to full year sales growth - the group has spent £220m over the year - and Compass is evaluating further bolt-on deals. It can certainly afford to do so; analysts expect year-end net debt to be down on last year, at around £700m.

However, management warned that although it was pleased with the levels of organic growth, it remained mindful of challenging economic conditions, which could impact like-for-like revenues in the near-term. That's evident in the UK & Ireland, where revenues are expected to be 4 per cent lower than last year despite a trading improvement in the second half. But tough market conditions also improve the case for outsourcing, and Compass' own focus on delivering operational savings and strengthening cash flows have been underpinning margin improvement and allowing it to re-invest in growth.

Charles Stanley says...

Buy. A positive feature of the group's development over the last four years has been the improvement in profit margins and returns. This trend has continued in 2010 and further gains are expected in 2011 and 2012. Margins have improved in all regions during the year and the group operating margin is expected to improve by about 40 basis points in 2010 compared to last year. Another key point in today’s announcement is the improvement in organic revenue growth. This has showed a good recovery from the recession which caused organic revenue to stall in 2009, but this year it is expected to advance by 3 per cent and the current run rate is about 5 per cent which sets the group up for a good year in 2011.

Numis Securities says...

Buy. Good organic sales growth has been driven by increased new business wins across the group and a slight improvement in contract retention - new business wins accelerated to near 10 per cent in the third quarter against contract losses of around 6.5 per cent. With a strong balance sheet and cash generative business model, Compass is becoming increasingly confident about accelerating the pace of mergers and acquisitions and we expect further activity in this area to strengthen the investment case. We remain buyers due to the excellent prospects for structural growth (from outsourcing), gearing to economic recovery and a continuing opportunity for margin expansion.