Compass Group - holding a steady course

Compass Group: This mass catering out-sourcing company, guided by Richard Cousins, just seems to keep cranking out steady numbers. These interims, to 31^st March 2015, show underlying revenue up 5.7%, pre-tax profits up 4.9% at £637m and eps up 12.3% at 28.4p (all constant currency). Adverse currency moves shaved 1 percentage point off the underlying revenue growth. On the back of this the interim dividend is up 11.4% at 9.8p. Good revenue growth was again seen in North America (52% group revenue) and emerging markets (17% of group revenue), whilst Europe (against a soggy economic landscape) and Japan returned to growth (combined 31% of group revenue), with a good pipeline of new business across the group. On top of this another 10 bps of profit margin was extracted to reach 7.5%, with more still targeted through their “MAP” programme of operational improvements.

A note of caution is sounded about emerging market economies, but overall they are set to deliver on expectations this year and are well placed to exploit the global structural trend towards out-sourcing. (They state that the outsourced food market is worth around £200bn annually, with about the same again not out-sourced. Compass’s annual revenue across all activities is some £17bn.) The group is cash generative and cash in excess of a net debt to EBITDA of 1.5x is returned to shareholders with a £500m buyback underway at present. At the half year net debt was £2,655m (a small rise due in part to a dividend payment) against historic EBITDA of around £1.5bn, being a ratio of 1.77x.

The shares are down 3.5% today at 1125p, maybe in reaction to the comments on emerging markets and a lack of upgrades. However, FY2015 forecasts look to be holding steady at eps of c55p for a PE of 20.5x, where a dividend of 28.5p would yield 2.5%. The shares look expensive to me, but the long-term nature of their growth opportunity helps to explain the high rating. As with many other stocks at the moment, which look a tad dear, the valuation looks more rational after a quick look at available bond yields. (Neil Cumming^, 13^th May 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower