Compass, the world's biggest catering company whose customers range from Chelsea Football Club to office workers and schoolchildren, has turned in an improved performance so far this year.
In a statement prepared for its annual meeting, the company said revenues declined by 1.7% in the first quarter, compared to a 3% fall in the fourth quarter of 2009. Operating margins have improved, and Compass pointed to a number of new contract wins, including Aviva, Visa and Banca d'Italia. It has also bought the Canadian support services business from Hurley Corporation for C$50m.
In a falling market - the FTSE 100 is down around 100 points or so at the moment - Compass shares have climbed 21.4p to 449.2p. Analyst Tony Shepard at Charles Stanley said:
This trend is positive because we anticipated Compass would return to organic revenue growth in 2011 but today's announcement suggests it is possible to show some positive like-for like growth in the second half of the current year. More encouragingly, the group has continued to deliver a further good improvement in operating profit margin compared to the same period a year ago and free cash flow conversion has remained strong. In the last financial year to September 2009, Compass improved its underlying profit margin by 70 basis points to 6.5%. After several years of improving the margin, we do not expect such a large margin gain in 2010 but confirmation of further efficiencies is still positive. On our forecasts, the share sells on a prospective PE of 13.2 times with a 3.4% dividend yield. We reiterate our buy recommendation.
Investec also issued a buy note calling Compass "a strongly managed business with good growth prospects over the medium term." Analyst Kevin Lapwood at Seymour Pierce was also positive:
Sales growth has improved in all four geographical regions and has been best in education, healthcare and defence. Business and industry and sports & leisure continue to decline but the trends were more encouraging in the first quarter.
Compass is now trading on a significant discount to its closest peer, Sodexo. We continue to recommend Compass as a buy and retain our target price of 475p.
