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Compass - strong first quarter

Charlie Huggins | 4 February 2016 | A A A
Compass - strong first quarter

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Compass Group plc Ordinary 10.625p

Sell: 1,673.50 | Buy: 1,673.50 | Change 0.50 (0.03%)
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Compass shares rose by 5% in early morning trading following stronger-than-expected first quarter results. Organic revenue grew by 5.9% in Q1, led by strong growth in North America (+7.9%). In Europe, organic revenue grew by 3.6%, while the Rest of World region was up 3.6%, despite weakness in commodity related businesses and a challenging environment in some emerging markets.

The outlook for 2016 'remains positive'. Growth in North America is strong, Europe is improving, and challenges in the Rest of World region are being managed; with the previously announced restructuring programme on track to deliver the expected savings.

Compass continue to focus on driving efficiencies and margin expectations are unchanged. In the longer term, they remain excited about the significant structural growth opportunities globally and the potential for further revenue and margin growth.

Our view:

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 reported a return on capital employed of 19.1% last year.

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 21x forward earnings estimates, versus a long run average of nearer 17x. 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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.