Compass Group trading statement

Provides contract food, catering and support services to a wide range of commercial businesses and government departments operating in over 50 countries.  I have a holding in my income portfolio (epic code: CPG).

Compass issued a trading statement ahead of its half-year end stating that  organic revenue growth for the first half is expected to be just over 4%, with an increase in the operating profit margin of around 10 basis points (bps).

Management said that they expect North America to show organic revenue growth for the first half of around 6% and the operating profit margin to increase by 10 bps; Europe & Japan is expected to have declined by just under 2.5% with the operating profit margin increasing by 30 bps and organic revenue growth in the first half for the Fast Growing and Emerging region to be around 9% with a 50 bps decline in the operating margin that they expect to reverse in the second half.

As for so many international businesses, Compass will suffer from a strong Sterling currency when reporting results this year.  Management have said they expect a negative currency impact of approximately 5.5%, or £486 million, on revenue and 5.7%, or £37 million, on underlying profit. If the current spot rates were to continue through the second half of 2014 they would expect a negative currency impact of 5.9%, or £1,029 million, on 2013 full year reported revenues and 6.2%, or £78 million, on 2013 full year underlying profit.

The currency impact is similar to the situation recently reported by Diploma, commented on here, where the share price fell by over 7.5% despite underlying growth of 7%.  Fortunately there is no such effect on the Compass share price that is down just 2.5p (0.3%) to 926.5p.  Compass currently looks to be fully valued on a one year rolling prospective P/E of 18 and a forward yield of 2.8%, my current view of a fair value range for Compass would be about 840-970p*.

*Using last year's FCF of £640m, an estimated 8 to 10% growth (FCF has grown by about 7% over the last 5 years) over the next 10 years and 3% in perpetuity; then discounting theses cash flows by 9.8%, which I judge to be CPG's cost of equity.

Compass Group's high levels of dividend growth (~15% pa over the past 5 years) and their consistent earnings performance have kept me invested.  They represent just over 5.5% of my income portfolio and, over the 3 years of my holding period, have produced an IRR of 23.5% pa.