Compass food inflation worries overdone, Killik says

7th Mar 2011 15:54

Contract caterer Compass is still a "buy" at Killik Capital, which thinks concerns about the sharp increase in food inflation have hit the shares unfairly.Investors have worried that the business won't be able to pass on higher costs, but the broker points out that the firm's business model provides some protection.Three contract types each account for a third of revenue. One bills the client for all costs in full, another sees Compass wear all the costs but retains any productivity gains, and a third fixes prices at the outset."Compass has traditionally traded at a premium to the market, and we believe this can be justified as a result of its growth prospects, attractive business model, excellent management, strong cash flow generation and high returns on capital employed," Killik says. "Following the recent weakness, the shares are currently trading on 12.6x 2012 earnings, and we reiterate our 'buy' recommendation."