Underlying numbers from Compass show the business performing steadily, with sales ahead by 6%, operating profits by 7% and earnings per share up 11%. The group's focus on achieving operating efficiencies through its Management and Performance regime remains undiminished, even if restructuring costs are offsetting the benefits short term.
Compass shares rose 1% in response to the results.
North America was strong for Compass last year and Europe and Japan are improving steadily. Emerging markets grew by 11%, neutralising a weak Australian market, where Compass is exposed to customers in the natural resources sectors. Overall, the group has positive expectations for the current year and expects growth from new contracts and restructuring benefits to offset the weakness seen in the Offshore and Remote markets.
- Organic revenue growth +5.8%, Organic profit growth +6.5 %
- Underlying margins rose 10bps to 7.3%, before restructuring costs
- Compass remains committed to ongoing shareholder returns - £328m of buybacks last year. Group to target net debt to EBITDA of 1.5x and will return capital to investors when it falls below this level
Compass is an intrinsically attractive business. Contract catering typically uses equipment and facilities owned by the client; little capital has to be invested, so returns can be strong. Compass just reported a return on capital employed of 19.1% (2014: 19.3 %).
Low capital requirements mean that cash generation is typically strong, which has allowed the return of significant sums to shareholders, over and above ordinary dividends that have grown every year for at least the last decade.
The group is generally performing well at present, with buoyant organic growth in most areas. But there are weak spots. The Remote & Offshore segment supplies mining and oil companies and they have pulled in their horns as lower commodity prices hit their incomes. Emerging markets as a whole are strong, but not universally.
Compass have decided to restructure these underperforming areas, and incurred £26m of restructuring charges last year, and there will be a similar impact in the current year. But given that the group generates cash from operations of approaching £1,500m, we can live with this.
Growth is driven by the group's Management and Performance plans, which seek to minimise unit costs, and underlying growth in demand. Demand is driven both by economic growth and the ongoing trend toward greater adoption of outsourced catering solutions, which has seen the addressable market increase substantially over very long time scales.
The stock currently trades on around 19x forward earnings estimates. Over the last five years, Compass has traded as low as 13x forward earnings and as high as 21x, so at the moment it is a little above its recent average PE rating. But there aren't that many stocks out there offering double digit dividend growth, backed up by a prospect of additional capital returns over time. Please remember though, that dividends are variable and not guaranteed.
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