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Compass Group - Still pointing to North America

Equity research team | 22 November 2016 | A A A
Compass Group - Still pointing to North America

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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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Full year earnings per share (EPS) rose 7.8% to 61.1p at the catering group. North America remained the strongest performer, with more mixed performances from other parts of the group. The full year dividend increased 7.8% to 31.7p per share.

The shares fell 3.3% in early trading.

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 19.4% this year.

Low capital requirements mean that cash generation is typically strong, helping the group grow its ordinary dividend every year for over a decade. Compass has also paid significant sums in share buybacks, although of course there are no guarantees this will continue.

The group is generally performing well at present, with organic growth in most areas. But there are weak spots. The Remote and Offshore segment supplies mining and oil companies and they have pulled in their horns as lower commodity prices hit their incomes.

Restructuring in these underperforming areas has cost the group £51m in the last two years. However this process is now at an end, and with the group generating over £900m in free cash this year we aren't unduly concerned - as long as it doesn't become a regular occurrence.

Growth is driven by rising underlying demand and the group's Management and Performance (MAP) plans, which seek to minimise unit costs. 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 19.7x forward earnings estimates, versus a long run average of nearer 16x . But there aren't that many stocks out there with such consistent records of dividend growth, backed up by a prospect of additional capital returns over time.

Full year results

Group organic revenue of £19.9bn increased 5% versus 2015. That was driven by 8.1% growth in North America, with more restrained growth of 2.8% in Europe.

The downturn in commodity prices continues to impact performance in the Offshore & Remote category. That had a particular impact on Rest of World where organic revenue fell 1.2%.

Group operating margin was flat at 7.2% as total operating costs rose 11%, driven by higher labour and food costs. The restructuring programme in Offshore & Remote is now complete. Free cash increased 26% to £908m, largely due to currency tailwinds. The group has "positive" expectations of 2017, with growth expected to be weighted towards the second half of the year.

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 for more information.

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