A 3 per cent fall CHK in the Compass Group share price looked like a mean way to respond to Richard Cousins’s last set of full-year results before he heads into retirement. During more than a decade at the helm of the catering group, he has transformed the fortunes of a company that had grown quickly through acquisitions but lacked financial discipline. In short, it had become better known for serving up profit warnings and issues with the way the company is governed than decent grub.
Shares in the world’s biggest contract caterer, down 53p to £15.38p, have been soft for a while, largely as a result of profit warnings from its two nearest competitors, Sodexo and Elior. It may be that the market was a little disappointed that Compass reported organic revenue growth of 4 per cent — at the bottom end of its target range of 4 per cent to 6 per cent.
The modest growth rate was due almost entirely to the continuing weakness in its offshore and remote operations, which suffered a 14 per cent fall in revenues and pushed Compass’s rest-of-the-world region to a 2.5 per cent fall in organic revenues. However, Mr Cousins said a restructuring of the division was having the desired effect and it was beginning to stem the drop.
As a result, he predicted that the organic growth rate for the group as a whole in the new financial year would edge back to the middle of the 4-6 per cent target “or a bit above”, albeit that revenue and margin improvement would be weighted to the second half. He said that after three difficult years, the offshore and remote business was now 80 per cent recovered and would be back in positive territory within the next nine to 12 months. Similarly, he forecast that the challenging Brazilian market would also turn slightly positive.
Europe, which Mr Cousins said had turned in a “steady performance”, lifted organic revenues by 1.6 per cent after a “pretty strong” year for its UK operations. Although the weak pound since the Brexit vote had brought about food price rises, he pointed out that the UK only accounted for about 10 per cent of Compass’s profits and that globally food inflation was not an issue.
North America, which accounts for almost 60 per cent of its revenues, was once again the star of the show, delivering organic revenue growth of 7.1 per cent and operating profits up 7.4 per cent. These impressive numbers were built on a contract retention rate of 96 per cent and new business wins such as Vivint Smart Home Arena, home of the Utah Jazz NBA basketball team.
One change made by Mr Cousins as soon as he joined the group in 2006 was to rein in the deal frenzy, instead spending no more than £100 million to £200 million a year on minor acquisitions and returning the large amounts of cash generated by the business to shareholders. Under his tenure, Compass has returned £9 billion via dividends and share buybacks, including £1.6 billion during the year under review, when it spent only £96 million on acquisitions.
The issue of whether Compass will be in a position to do another buyback in the coming year will be down to his successor, Dominic Blakemore, although Mr Cousins did speculate that, having just forked out $280 million for a controlling stake in Unidine, a US healthcare and seniors market caterer, slightly more than its usual budget, there were unlikley to be any extra cash returns for at least the next six to nine months.
Another factor in the recent softness in the Compass share price is the premium rating it enjoys. One analyst pointed out that while shares in the FTSE 100 are on average valued at about 14.5 times companies’ predicted earnings per share, the catering behemoth is trading on a multiple of about 20. Given the political and economic turbulence, such caution might be justifiable, but Compass has shown itself to be a resilient performer through such uncertainity.
ADVICE Long-term hold
WHY Its premium rating is justified by the consistency and quality of its growth and the promise of regular cash returns.
Johnson Matthey
Given that Michael Gove, the environment secretary, has foisted a policy on the government of eradicating the internal combustion engine within 25 years, companies in the supply chain of polluting vehicles should be considering their futures. Johnson Matthey is doing just that.
The £6 billion, FTSE 100 sustainable technologies group has made its reputation with the development of catalytic converters, the kit in automotive exhaust systems that detoxifies vehicle pollutants. This business accounts for about two thirds of Johnson Matthey’s £3.9 billion sales and £550 million of operating profits. Despite the toxic debate around dirty diesel, it is a growing business.
The journey towards eradicating petrol and diesel-driven vehicles by 2040 is going to be a long one. There will be ever tighter regulations for the production of petrol and diesel engines. That, it is said, plays into the hands of the likes of Johnson Matthey and BASF, of Germany, which help to clean them up. From about 2025, when most cars are likely to be hybrid, there will still be an internal combustion engine under the bonnet with a remit to be as close to zero emissions as possible.
Some time over the next decade, Johnson Matthey will need to be in a completely different business — it is already involved in oil and gas and pharmaceuticals — or in a replacement business. It has chosen replacement and committed itself to developing the chemistry of lithium-ion batteries, which power the motors of electric cars.
The problem is that nobody knows how the technology will play out. If battery vehicles arrive sooner than some predict, Johnson Matthey could be left flat-footed. If there was agreement that this company is to be a winner in the revolution, one might expect its shares to be trading on a technology-style multiple of more than 20 times its forecasted earnings. Yet even after an 112p slide yesterday to £31.58, on the back of flat underlying half-year profits, the stock is still trading on 15 times forecast earnings. That is high enough for what we can see in front of us.
ADVICE Avoid
WHY More than fairly valued on fundamentals of business
