Compass full-year operating profit rises, outlook positive

Contract caterer Compass Group reported a rise in full-year operating profit and revenue on Tuesday thanks in part to strength in its North American business.

In the year to 30 September, underlying operating profit was up 7.1% to £1.74bn as revenue increased 5.5% to £23.24bn even as the operating margin was flat at 7.4%.

Earnings per share pushed up 12.5% to 77.6p and the company lifted its annual dividend per share by 12.5% to 37.7p.

Compass saw "excellent" growth in North America, with organic revenue up 7.8%. In Europe, organic revenue was up 2.1%, driven by strong net new business in the UK, while revenue in the rest of the world was up 2.9% thanks to good growth in Turkey and Spanish-speaking Latin America.

The company noted that on a statutory basis, revenue, operating profit and earnings per share growth were lower than underlying results mainly due to the adverse impact of foreign exchange during the year.

Statutory operating profit was up a less impressive 1.5% to £1.69bn, with revenue 1.8% higher at £22.96bn and EPS down 0.4% to 71p.

Chief executive Dominic Blakemore said: "Compass had another very strong year. Revenue growth was healthy, driven by excellent growth in North America, an acceleration in Europe and good progress in Rest of World.

"We continue to drive operating efficiencies around the business and were able to move the margin slightly forward, with improvements in Rest of World offsetting a more difficult volume and cost environment in Europe, especially the UK.

"We are actively managing the portfolio to increase our focus on food and are in the process of disposing of up to 5% of revenues in non-core businesses. We continually look at bolt-on acquisition opportunities that strengthen our offer and meet our strict returns criteria."

Blakemore said the company's expectations for FY2019 are positive, with a strong pipeline of new contracts. The group expects organic growth to be in the middle of its 4-6% range with modest margin progression.

RBC Capital Markets analyst Andrew Brooke said this was a "very solid" set of results overall, especially given the second-half weighting this year.

"In a sector where diversification has generally caused mishaps, we believe Compass's focus on a single specialism i.e. catering is a key differentiator. The investment it has made in branding, sectorisation and procurement has meant it has grown faster, with higher margins than catering peers and especially those that have gone down the bundled services FM route.

"This is especially the case in the US, where it has benefited most from its third-party procurement arm. The strong retention rate also suggests Compass is doing something right in terms of both service and offering.

"Compass continues to deliver and these results are a reminder of the strength of the equity story. Whilst the derating of 'bond proxies' is a risk, Compass is one of the better valued defensives in the sector and we expect trading to remain strong, with balance sheet options."

At 0810 GMT, the shares were up 2.8% to 1,632p.