More on Compass
Compass: H1 results
Despite the management’s comments Compass has problems that go far beyond the one-off winding down of high margin military contracts with margins continuing to shrink this year.
Given the weak margins in the second half of last year, it is no surprise that Compass’ margins were well down on the (already bad) first half of last year. Operating profit fell another 5.1% despite strong growth revenue growth (10.8%, 8% organic at CER).
Although part of the reduction in margins was due to the winding down of the exceptionally high margin military contracts in the Middle East, this is clearly only part of the problem. Even excluding these contracts operating margin fell 60 basis points. The ending of the military contracts only lost Compass another 20 basis points of operating margin so their effect, while significant, is not the real problem.
Some of the fall in margins can be attributed to restructuring costs, but even after adjusting for this margins fell both overall and in every region other than North America. Compass previously had significantly better operating margins than Sodhexo, its nearest and largest competitor, so the fall in operating margin looks like a return to industry norms.
At 240p Compass is not expensive on a prospective PE 15.6× with a 4.1% yield. We would be cautious about expecting fast recovery, but margins should stabilise and the industry has good prospects for moderate (above 5% a year) long term growth.
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