A brief trading update revealed third quarter organic revenue growth of 3.9%. Excluding the negative impact associated with the timing of Easter, the group was able to report improving trends in revenue growth in all geographies in the quarter. The shares rose 2.5% on the news.
Contract catering is an intrinsically attractive business. As Compass typically uses equipment and facilities owned by the client, little capital has to be invested and returns can be strong. Compass reported a return on capital employed of 19.4% last year.
Low capital requirements help generate healthy cash flows, which have in turn helped the group grow its ordinary dividend every year for over a decade. Compass has also paid significant sums in share buybacks and special dividends, 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 & Offshore segment supplies mining and oil companies, and they have pulled in their horns as lower commodity prices hit home. Restructuring the division cost Compass £51m over the last two years, but that process is now at an end, and margins are rebounding as a result.
Long term demand is driven both by economic growth and the ongoing trend toward greater adoption of outsourced catering solutions, which has seen substantial increases in the addressable market over the long term.
A broad customer base that ranges from Aston Villa to De Beers in South Africa and Verizon in the US means revenues should prove resilient. The group is also targeting margin gains through its Management and Performance (MAP) plans, which seeks to minimise unit costs.
The stock currently offers a prospective dividend yield of 2.4% for 2018 and trades on 20.4 times forward earnings estimates. While this is above its long run average of nearer 15x, there aren't that many stocks that can match Compass' record of dividend growth, and still offer the prospect of additional capital returns over time.
Third Quarter Trading
The group reported strong third quarter net new business in North America, while organic revenues increased 7.1% (7.8% excluding Easter). This included growth across all sectors except in the oil & gas business.
Compass also confirmed it has made good progress in Europe, where organic revenues declined by 0.3%, but would have risen 2.2% were it not for the effect of a later Easter. The Rest of World division, which includes the offshore & remote business, is improving, but conditions remain challenging. Organic revenues declined 1.3% (down 1.1% excluding Easter), ahead of the 3.8% decline seen year-to-date.
The group also confirmed overall operating margins have improved by 0.2 percentage points year to date, boosted by the completion of its Offshore and Remote restructuring programme.
Looking ahead, the group remains upbeat on its prospects for the full year, with further progress in all major geographies. Year-end net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) is expected to be around 1.7x, ahead of the group's 1.5x target.
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