Compass Group finals

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 Group released their final results on Wednesday 26 November and were as indicated in their trading statement on 29 September, commented on here.  The SP now is at an all time high of 1090p and is probably fully values the company. 

 

Revenue for the Group increased by 4.1% on a constant currency basis to £17.1bn and underlying operating profit increased by 5.9% to £1,245m, with reported operating profit at £1,217m up 51.7% due to goodwill impairments taken last year (see here for the details from last year).

 

The largest region North America had a good year with revenue up 6.8% on an organic basis to £8.2bn and operating profit increased by 7.9% on a constant currency basis to £666m. 

 

Europe & Japan continued to decline, this year by -1.5% on an organic basis to £5.7bn, but this was a slower rate than last year's 3%.  Operating margins were improved in this region through efficiency improvements and cost reductions, so operating profit increased by 1.2% on a constant currency basis to £409m.

 

Fast Growing & Emerging Markets saw good organic growth at 8.2% in revenues to £3.1bn and operating profits up on a constant currency basis by 7.6% to £226m. 

 

 

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EPS was 48.7p up 10.5% on a constant currency basis and 110% on a reported basis. The final dividend was increased by 10.6% to 17.7p, to give a full year dividend of 26.5p an increase of 10.4% and is covered 1.84 times by earnings.

Return on capital employed was over 25%, compared to their weighted average cost of capital of 8.2% and their 3year average free cash flow return on capital employed was over 15%.  These are very good indications of a business that adds substantial value, well above the cost of the capital deployed in the business, ensuring there is sufficient capital to invest in non-organic growth and deliver above market returns for their shareholders.

 

Free cash flow at £680m was similar to last year and with dividends paid of £444m, share re-purchases of £280m and a £1bn return of capital to shareholders, net debt rose by £1.1bn to £2.4bn.  Equity has been depleted by almost £1bn from last year to £1.8bn, due to the share re-purchases and the return of capital, consequently gearing is high at 130%.  So is this level of debt a concern for Compass?  Looking at a debt/EBITDA of 1.5x and operating cash flow of 47% of debt, whilst not amongst the best, is very comfortable.  Management though should reconsider their share re-purchase programme especially with a SP that is close to 10x its NBV.  Standard & Poors give Compass an A rating and consider it stable.  The company pays just over 4.5% on their mix of debt and the maturity profile is well balanced, as demonstrated by the chart below that shows the maturity dates for their debt:

 

Click on chart to enlarge

 

 

Looking ahead to next year, management state that the pipeline of new contracts is healthy and they expect to see further good performances in all of their regions.

 

For the longer term they expect to deliver further cost efficiencies, which will help to support future growth and further improve the operating margin.

 

Opportunities remain good for Compass to continue to grow the business; as management stated "...The structural opportunity in the outsourced food service market, estimated at more than £200bn, is a key growth driver.  With only around 50% of the market currently outsourced..." add to that the small regional players that service about 33% of the market and may be open to acquisition or loss of market share through competition, then Compass despite its size should have many years of good growth ahead of it. 

 

 

 

 

A good set of results from Compass, but at the current SP there is no margin of safety.  Patience can provide opportunities though, when you consider that during the past 12 months, when there was no change in expectations for the business, there is a 23% swing from the low to the high in the SP.  The major risk to the business remains food commodity prices.