Chips are down for Compass

Analysts have slashed forecasts for Compass Group, as the owner of Harry Ramsden’s fish and chip restaurants grapples with the impact of international accounting standards in its 2005 interims.

Despite assurances from the foodservice giant that the standards would have no impact on the group’s cash position, equity research teams last week sliced their net income, share price and EPS forecasts.

‘We have not yet fully implemented IFRS into forecasts, but we believe that doing so would lead to at least 10% EPS downgrades for the 2006/2007 financial year,’ said analysts at UBS. ‘Taken together, the IFRS impacts would suggest a downgrade of around £55m to £65m to net income.’

Compass, which also owns the Upper Crust brand, is set to be hit particularly hard by the tax impacts of the international standards, as under IFRS it would lose the tax shield offered by US goodwill.

The company said that this hit, coupled with a government clampdown on tax avoidance, would increase its tax charge and increase tax rate volatility.

‘Overall, the group’s tax rate under IFRS is expected to be more volatile than under UK GAAP,’ the company said. ‘This, combined with the 2005 budget impact on cross-border financing structures, means that the group’s tax charge for 2006 onwards is expected to move to around 30% (from the mid to high 20s).’

Meanwhile, analysts at Dresdner Kleinwort Wasserstein expressed concern about a £150m pension deficit that would come onto Compass’ books when it releases its first IFRS accounts in 2006.

‘The announcement that the pension liabilities would rise by around £150-£170m net of deferred tax under IAS19 came out of the blue, and knocks 7p to 8p off the share price,’ the analyst said.

Despite the negative reaction to the impacts of IFRS on Compass, the group’s FD Andrew Martin stressed that the business would not be materially impacted.

‘The impact of IFRS pre-goodwill amortisation would be to reduce EPS by 13% to 15%. The key point here is that there is no material impact on cash,’ Martin said.

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