Recovery at Compass

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There have been three phases in the life of Compass, the catering group. For more than a decade after its creation in the late 1980s it was an acquisition machine, becoming the biggest operator in its industry worldwide. Between 1995 and 2003, sales grew by eight times and assets by 11 times. By 2004, all the familiar symptoms of corporate overstretch were manifest: margin collapse; creaking management accounting systems; a loss of control of working capital; and a chief executive and chairman who had, combined, been at the company for 29 years.

Last year Sir Roy Gardner and Richard Cousins were appointed as chairman and chief executive respectively, to implement the third phase: recovery. As Thursday’s trading statement revealed, things have been going pretty well. Strategically, the objective is to retreat from unprofitable contracts and cut the number of countries in which the company operates from 90 to about 60 – goodbye Burundi. Tactically the emphasis is on tighter execution. The £1.8bn sale of the transport services business in the summer and the planned sale of vending unit Selecta for perhaps £700m should leave the balance sheet under control, with net debt at about 10 per cent of enterprise value.

The shares have returned 51 per cent over the past 12 months and at 335p are near their level before the wheels came off. With a multiple of 21 times 2008 earnings, much is discounted, particularly since cash returns are already high: the pay-out ratio was about 90 per cent last year. Cost inflation and a lack of pricing power mean raising margins is hard work. Still, as evidence of progress builds, focus will turn to the next phase in Compass’s life and to “blue sky” scenarios. Expectations may not have peaked yet: if margins returned to their high of 7.7 per cent in 2001, Compass would be trading on just 12 times 2008 earnings.

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