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Compass full year results
The full year results were similar to the first half, but margins were even worse. Revenues rose 8.3% and underlying (excluding goodwill and exceptionals) operating profit fell 7.7%. Reported EPS fell to zero, adjusted EPS fell 8.6% to 19.1p.
The fall in operating profit has come from Compass’s UK operations - underlying operating profit rose in North America and the rest of the world. The latter did see a fall in margins as military contracts in the Middle East shrank, but the effect of this was offset by sales growth elsewhere. Operating profit in the region grew 3%.
The worst of the decline in margin, and the fall in operating profit, came from the UK. Compass is facing price pressure in this market, and if it is becoming more competitive it is difficult to see how margins can be restored in the contract catering business. The travel concessions business declined by more than contract catering, with lower sales growth (4%) and a sharper drop in operating margin (from 16.3% to 9.8%). Compass attributes part of the fall to the impact of the London bombings on rail travel, we would add that it is likely the slower consumer spending has also probably had an effect.
Compass plans to sell its travel concessions business, SSP. This would leave it more focused on contract catering. We did not feel that Compass lacked focus as such, but disposing of those businesses that involve retailing will simplify Compass.
The scandal over UN contracts will continue to bring bad publicity, but at the moment it does not look likely to have much impact on profits.
Profit at other levels looks better than operating profit which suffered from a high depreciation charge. EBITDA fell only 3%. Free cash flow was also almost unchanged once the impact of a one-off loss last year on swaps is excluded.
This year looks likely to be difficult. The geographical pattern of performance will probably be similar with the UK struggling to avoid further declines, but steady growth elsewhere.
At 200p Compass is trading on a prospective PE of around 11×. The short term outlook is poor but the planned sale of SSP will release some value. In the long term we expect the contract catering market to continue to expand - there is still plenty of room for in-house catering to be out-sourced - and Compass, as a major player, should grow with the market. The 4.8% yield provides significant support at this price.
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