ii view: Europe leaves a bitter taste at Compass

Management moves to sharpen its focus on costs. Where now for investors?

Full-year results to 30 September 2019

• Revenue up 8.8% to £24.89 billion
• Pre-tax profit down 3.5% to £1.47 billion
• Net debt down 3.3% to £3.27 billion
• Total dividend payment for the year up 6.1% to 40p per share

Guidance: 

• 2020 organic growth around the mid-point of a 4-6% guidance range

Chief executive Dominic Blakemore said:

"Compass has had another strong year. Organic revenue growth was 6.4%, ahead of our target range, thanks to excellent growth in North America and an improving performance in Rest of World. There was good growth in our European business with strong performances in UK Defence and Sports & Leisure offsetting weak volumes in Business & Industry. 

"Despite this good performance, we are not immune to the macro environment. Deteriorating business and consumer confidence in Europe has impacted our Business & Industry volumes, new business activity and margin. Given these trends, we are taking prompt action in Europe and certain Rest of World markets to adjust our cost base. 

"In the longer term, we remain excited about the significant structural growth opportunities globally, the potential for further revenue and profit growth, combined with further returns to shareholders."

ii round-up:

Although generating just over 85% of its sales from food services such as canteen provision, Compass Group (LSE:CPG) also offers support services such as office reception provision and hospital cleaning services. 

Founded in 1941 as Factory Canteens, today it operates across five sectors including business and industry, healthcare, education and defence and offshore. 

Employing around 600,000 people, it works in over 55,000 client locations in more than 40 countries. 

For a round-up of these full-year results, please click here. 

ii view:

Offering canteen services to a diverse range of clients and across a broad spread of countries, Compass is generally viewed as both defensive and diverse. Steady cashflow has to date underwritten 15 consecutive years of dividend increases. 

But the group, which breaks its geographical regions into North America, Europe and the rest of the world, has in these latest results shown that it is not immune to falls in business confidence. Europe, its second-biggest region by sales at just over 23%, reported a near 7% fall in underlying operating profit. Management action is being taken. 

For investors, an enviable dividend growth track record and dividend cover of over two times earnings remains the core attraction. But a forward price/earnings (PE) ratio standing above the 10-year average suggests the shares are not obviously cheap, with investors for now potentially taking a wait-and-see approach. 

Positives: 

• Targeting growth via bolt-on acquisitions
• Cost saving programme being sharpened

Negatives:

• Reported lower European volumes for its business & industry clients
• Risks from a food hygiene or safety failure

The average rating of stock market analysts:

Hold