Compass Group delivered half year underlying revenues £11.5bn, a 4.8% increase on the prior year. The group says the timing of Easter and poor weather held back growth by around 0.5 percentage points.
The shares fell 2.5% on the news.
The interim dividend rose 9.8% to 12.3p per share.
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.
There aren't many stocks that can match Compass' record of dividend growth, and offer the prospect of additional capital returns. However, always bear in mind there are no guarantees. The stock currently offers a prospective dividend yield of 2.3% for 2018 and trades on 19.9 times forward earnings. That's above a long run average of nearer 15.7x.
Half year results (constant exchange rates)
Margins were slightly weaker than the prior year, impacted by inflation and the cost of making changes to the UK business. This meant operating profit increased 4.5% to £875m, slightly behind the rate of revenue growth. However, share buy backs over the preceding 12 months ensured earnings per share rose 9.8%.
In North America, the group's largest business area, revenues rose 7.3% to £6.7bn. Improvements in pricing, a retention rate of 97%, and new contract wins helped offset the impact of continued challenges in the small offshore & remote business. Underlying operating profits rose 7.7% to £575m.
Good levels of new business in the UK and Spain countered subdued trading in the rest of Europe, which restricted revenue growth to 0.5%. However, higher costs saw margins fall to 6.7%, meanings the division made an operating profit of £197m on £2.9bn of revenues, a decline of 9.6%.
The Rest of World segment saw revenues rise 3.4% to £1.9bn, with operating profits up 9.7% to £124m. Results were boosted by a strong performance in Turkey.
Looking ahead, the group is confident recent operational changes, which hurt margins at the interim stage, will bear fruit in the second half. That means full year expectations are unchanged. Compass still anticipates organic growth in the 5-6% range, and modest margin progression.
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