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Compass Group - Still serving up steady growth

Nicholas Hyett | 15 May 2019 | A A A
Compass Group - Still serving up steady growth

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Compass Group plc Ordinary 11.05p

Sell: 1,704.50 | Buy: 1,705.00 | Change 56.00 (3.41%)
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Underlying revenues rose 6.6% in the first half to £12.5bn. Increased cost pressures in Europe meant operating profits increased at a slightly slower rate of 5.8%, to £951m.

The interim dividend rose 6.5% to 13.1p per share.

The shares rose 2.4% in early trading.

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Our View

Contract catering is an intrinsically attractive business. Since Compass typically uses equipment and facilities owned by the client, capital requirements are low and returns are strong. The result is a return on capital employed of over 20%.

That helps generate healthy cash flows, which have in turn seen the group grow its ordinary dividend every year since the start of the century. 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, notably 'Offshore & Remote'. The division supplies mining and oil companies, sectors that have pulled in their horns in recent years as lower commodity prices hit home. Restructuring the division has helped cut costs, but the division's still not flourishing.

Longer term, demand for Compass' services 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 the Ministry of Defence to luxury watchmaker Patek Philippe means revenues should prove resilient. The group is also targeting margin gains through its Management and Performance 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. That's reflected in the share price though, with the prospective dividend yield at 2.6% next year and a price to earnings ratio of 19.9. That's well above the long run average of nearer 16.

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Half Year Results (constant currency)

Revenues rose 9% North America, to £7.7bn, with new business, pricing and a good performance in Sports& Leisure all playing a part. Underlying operating profit of £664m increased 9.4%, boosted by ongoing efficiency initiatives.

The Europe division saw revenues rise 2.7% to £3bn with some significant Defence contract wins in the UK during the period. However, underlying operating profits fell 2.5% to £192m, as costs associated with new business wins increased.

Rest of World revenues rose 2.8% to £1.8bn, with strong results in Turkey and the Offshore & Remote business, particularly in Kazakhstan. Underlying operating profits rose 4.3% to £121m.

Compass invested £370m on bolt-on deals during the half, mostly in North America, with a good pipeline of further opportunities. The group completed disposals worth £68m.

Free cash flow increased 14% to £530m, with underlying free cash flow conversion of 56%. However the M&A activity, and the increased 2018 dividend, meant net debt increased 5.1% to £3.6bn.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.