US Edition Compass
566p +38½
Questor says BUY
The company said that the underlying operating margin would improve by 40 basis points, which it duly did, and management believes there is more improvement to come. The group is targeting a medium to long-term margin expansion to 8.5pc, compared with 6.9pc in the last financial year.
Compass is the world's largest catering group and provides
in-house services for businesses including Virgin Media and the Barbican Centre, as well catering for special sporting events such as Wimbledon, the Henley Regatta and Cartier Polo.
In the 12 months to September 30, revenues rose 7.6pc to £14.5bn and pre-tax profits rose 18pc to £913m. This was a record result. Importantly, the group saw a return to organic growth of 3.2pc, compared with a flat performance last year. Compass had guided to organic growth of "towards 3pc".
The rate of new business wins also accelerated, reaching 10pc of revenues in the second half of the year. Client retention also improved slightly to 93.2pc, reflecting fewer bankruptcies and corporate failures compared with the previous year, as well as an increased investment in retention.
Compass's North America operations showed very impressive growth. The company won new contracts at The Gates Foundation's new campus site and Amazon.com's headquarters, as well as at Sun Microsystems, part of a larger Oracle contract. All of this boosted revenues in the region by 9.7pc.
The rest of the world also showed strong growth, with sales up 18.1pc, but Europe was sluggish. Revenues growth in Continental Europe rose 2.2pc, with the UK & Ireland showing a 2.6pc fall in revenues.
One other important piece of news related to the dividend. The company has rebased the payment by increasing the full-year payout by a third.
A final dividend of 12.5p a share will be paid on February 28, bringing the total payment to 17.5p – a 32.6pc increase. The payout is covered by earnings more than two times and this was significantly more than the market was expecting. Indeed, as can be seen in the graphic, the consensus view of next year's dividend now stands below the level of the 2010 payment. The consensus forecast will now have to rise.
The company has proved very defensive through the downturn and this was why the shares were initially recommended as a buy. However, Compass now appears to be looking for growth. There are plenty of outsourcing opportunities in the global food service business but the group is building its exposure to associated support services, too.
The shares are trading on a September 2011 earnings multiple of 13.7 and on its rebased dividend the shares are yielding 3.2pc.
The shares were recommended at 306¼p on November 30, 2008, as a defensive play in turbulent times. The shares are up 85pc since then, compared with a FTSE 100 up 33pc. Investors who bought in on the initial recommendation would have locked in a yield of 5.7pc.
The shares remain a buy for growth.