Most likely within the past few days – and without knowing it - you have had a meal, or at least a snack, provided by Compass; whether it was passing through a major transport terminal, at a sports stadium or perhaps in your workplace. As Compass itself says: "Millions of people around the world rely on us every day to provide their breakfasts, lunches and dinners".
- Long-term growth in contract catering
- Strong cash flow
- Smartly growing dividend
- Geographic diversity
- Tough in Europe and Japan
- Continuing restructuring costs
And that's what helps make shares in Compass such a reliable investment – the long-term trend for organisations of all sorts to contract out their catering arrangements, driven by the need to save money and to comply with increasingly complex regulations. Compass reckons the global market is worth about £200bn a year, but only about half of that is currently outsourced. While privately-owned companies have widely adopted contract catering, in the public sector – especially health care and education – there are still major opportunities.
And Compass has shown itself to be good at winning business from this growing pool and at keeping its clients. Last year it kept 94 per cent of them, compared with 95 per cent the year before and 93 per cent the year before that.
The constant performer - percentage per annum growth
| year to end Sept | Revenues | Underlying EPS | Dividends |
| 2012 | 8.0 | 10 | 10 |
| 2011 | 9.2 | 9 | 10 |
| 2010 | 4.7 | 15 | 33 |
| 2009 | 1.3 | 15 | 10 |
| 2008 | 5.9 | 45 | 11 |
Source: company accounts
Loyal customers, combined with contract wins and small bolt-on acquisitions has created an exemplary growth record. In the past five years, Compass's constant-currency revenues have grown by 6 per cent a year on average; its underlying EPS by almost 19 per cent and its dividends by 15 per cent (see The constant performer table).
It helps that food services is reasonably defensive - people have to eat after all. That said, the world's economic malaise has presented challenges. In particular, Compass has problems in Europe and Japan, which comprises a third of its business. As a result, in September its bosses announced a £345m re-structuring in Europe, most of which was focused on its southern European operations. One effect was to hack 27 per cent off pre-tax profits for 2011-12 and £50m of cash costs are still to be taken in the current financial year. However, the aim is to save £50m in running costs this year, rising to £75m a year from 2013-14.
Management says that so far the restructuring is going to plan. But Europe's economies continue to suffer, so it may be too optimistic to expect much more than the effects of self-help and some acquisition growth from this side of the business for the time being.
Fortunately, Compass is geographically diverse and demand from other markets is much stronger. For some time, the group's real growth engine has been the two thirds of its business conducted in North America and what it terms ‘fast-growing and emerging markets’. Last year North American turnover advanced 10 per cent to £7.5bn, while profits rose 11 per cent to £235m. In fast growing and emerging markets, turnover was up 14 per cent to £3.1bn and profits also increased 14 per cent to £235m. What's more, the pipeline of new business remains encouraging.
COMPASS(CPG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 734p | MARKET VALUE: | £13.5bn | |
| TOUCH: | 733-734p | 12-MONTH HIGH/LOW: | 744p | 578p |
| DIVIDEND YIELD: | 3.2% | PE RATIO: | 16 | |
| NET ASSET VALUE: | 174p | NET DEBT: | 30% | |
| Year to 30 Sep | Turnover (£bn) | Pre-tax profit (£bn) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 13.8 | 0.78 | 30.0 | 13.2 |
| 2010 | 14.5 | 0.92 | 35.7 | 17.5 |
| 2011 | 15.8 | 1.01 | 39.0 | 19.3 |
| 2012 | 16.9 | 0.79 | 32.1 | 21.3 |
| 2013** | 17.7 | 1.17 | 46.8 | 23.8 |
| % change | +5 | +6 | +7 | +12 |
Normal market size:4,000 Matched Bargain Trading Beta:0.7 * Investec Securities (profits & earnnings not comparable with historic figures) | ||||
As Compass's business is built on contracts rather than hard assets, cash generation is an important indicator of the group's overall health. Here the performance looks acceptable. While headline profits for the year to end September were in line with the City’s expectations, Compass generated more free cash than was forecast. At £709m, free cash flow was a touch higher than the year before, but management claims 'underlying' cash flow generation of £760m, 10 per cent higher than 2010-11, after ignoring some one-off cash costs.
The benefits for shareholders from decent cash generation are evident in three ways. First, there is the strong record of dividend growth. Second, cash has been used to fund earnings-enhancing bolt-on acquisitions. Third, with net debt at a relatively modest £973m - equivalent to just 0.6 times the cash profits expected in the current year by broker Investec - the company continues to buy back shares. In November management said that, following the completion of a £500m buy back in 2012, the company would start on a £400m buy back in 2013. This supports the share price, both by providing extra demand in the market place and by boosting to EPS.
