First quarter revenues were up 5.9% on the same time last year, with a healthy flow of new business wins, good customer retention and solid like-for-like revenues. Compass continues to make cost savings both in the UK and internationally.
Shares rose 5% in early trading.
Contract catering is an intrinsically attractive business. Since Compass typically uses equipment and facilities owned by the client, little capital needs to be invested up front and returns can be strong. Compass has a return on capital employed of over 20%.
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, with organic growth in most areas. But there are weak spots.
'Remote & Offshore' 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.
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 2.5% for 2018 and trades on 18.4 times forward earnings. That's above a long run average of nearer 15.5x. However, there aren't many stocks that can match Compass' record of dividend growth, and offer the prospect of additional capital returns over time.
Q1 Trading Update
Growth was led by a strong performance in North America, which saw revenues grow 8.2% - driven by good results from Healthcare & Seniors, Vending and Sports & Leisure. European organic revenues increased 2.1%, with good results in the UK.
Rest of World saw a 4% increase in revenues, thanks to strong performances in Turkey and parts of Latin America, partly offset by a small decline in the Offshore & Remote business.
Compass spent £265m on acquisitions in the quarter. Most significant was US Healthcare & Seniors caterer Unidine, which has annual revenues of $220m.
Management now expects full year revenue growth to be at the upper end of its 4-6% organic growth guidance range, accompanied by modest margin progression thanks to efficiency plans.
Unfavourable currency movements had a negative impact of £288m and £24m on revenues and profits in the first quarter. At current exchange rates the full year negative impact would be £1.2bn and £97m.
The group expects to benefit from lower tax rates in the US this year, with the effective tax rate falling from 26.5% to 24%.
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