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Questor: Compass sticks to the recipe for succession and serves up steady growth
Succession planning says a lot about a company. By the time Carolyn McCall arrives to run ITV in January it will be more than six months since her predecessor, Adam Crozier, left the building. If the bench strength is there, better the effortless handover to a long-term lieutenant, as seen at InterContinental Hotels Group over summer when Keith Barr replaced Richard Solomons. And best avoided at all costs is the row developing at the London Stock Exchange, where one shareholder has called for chief executive Xavier Rolet’s retirement to be halted and the chairman Donald Brydon to resign instead.
Compass Group has taken the textbook path. The contract caterer said in September that Dominic Blakemore will succeed Richard Cousins at the helm next April. The change was not unexpected, given that Cousins has been in the role for 11 years. Few shareholders expect a strategy shake-up given that Blakemore has filled a number of key roles since arriving from Birds Eye fish finger maker Iglo Foods five years ago. That’s just as well, given the City is hungry for more of the same. On Cousins’ watch, Compass shares have increased sevenfold and investors have been fed £9bn in dividends and share buy-backs.
Full-year results on Nov 21 should really get the retirement party going if third-quarter trading is anything to go by. Underlying sales growth eased to 3.9pc compared to 4.4pc in the second quarter, but analysts at Jefferies think that if the timing of Easter and the 2016 leap year are smoothed out, growth actually accelerated from 3.8pc to 5pc. Suggesting 5.9pc growth in the fourth quarter, the bank flags that strengthening margins makes guidance from the company look conservative unless the upside is being reinvested back into the business.
Compass serves five billion meals from 40,000 sites around the world every year, in office canteens and sports stadiums, but North America remains its engine of growth. Accounting for 58pc of sales, it is growing at more than 7pc, with oil and gas the only industry sector on short rations.
The key has been to win new contracts and retain old ones across a vast spread of activities that means Compass can soak up cost pressures and economic uncertainty. It has also benefited from the weak pound boosting its numbers. Under Blakemore’s guidance, the £26bn group has been trying to replicate that level of success in Europe, where the top line is more sluggish.
It has consolidated the region into nine business units with savings made from common finance, purchasing and health and safety functions.
There is better news from UK operations, which are busy once again after the Brexit vote had the effect of pausing contract awards. In addition, the recovery of the oil price to two-year highs should help Compass’s offshore division, which is traditionally a higher-margin business and has struggled in recent years as exploration projects were put on ice.
Structurally, there is more to go for. This food service sector is estimated to be worth £200bn, with 80pc of catering still operated in-house or by regional players.
Any business looking to save money can easily hand over its kitchen keys to a specialist.
Anecdotally, Compass is outperforming its largest rival in this area, the French group Sodexo. It is also worth noting that the chairman is Paul Walsh, who as chief executive of drinks giant Diageo drove the US franchise of another UK blue-chip to fresh highs.
The challenge for investors is whether the Cousins legacy is already priced into the shares. Compass stock dipped on the day it was announced he was leaving but has since ticked up 5pc. One buying opportunity has gone.
The company is not short of fans. RBC Capital Markets thinks underlying sales growth of 4-6pc a year is sustainable with margins improving incrementally from efficiencies in food and labour. Compass underlined its strong cash flows in May when it unveiled a £1bn special dividend.
RBC reckons there is scope for second helpings – another £2.3bn of excess cash that could be handed back over the next three years.
It is a tempting morsel but trading at 22 times this year’s forecast earnings, Compass is high quality but highly priced. This meal is too rich for investors keen to avoid indigestion. Hold for now.
questor@telegraph.co.uk