29th Jul 2015 11:43
LONDON (Alliance News) - Shares in catering services and outsourcing company Compass Group PLC were rooted to the bottom of the FTSE 100 on Wednesday after the group said it would book some restructuring charges related to its oil and gas-exposed business, which will flatten its margins for the 2015 financial year, though organic revenue held up in the third quarter.
Compass said it is delivering good operating efficiencies in its 2015 financial year and said its operating margin has improved in the first nine months. But Compass said that, in addition to the ongoing restructuring activities it has undertaken, it is proactively cutting costs in its offshore and remote business, which primarily serves the oil and gas and mining industries.
The incremental restructuring plan it will launch for this division will cost the company GBP20 million to GBP25 million a year in both 2015 and 2016 and, as a result, will mean its operating margin for the 2015 financial year to the end of September will be flat.
Compass said it expects the savings, along with further margin improvements across the rest of the group, to offset the impact of lower volumes and pricing pressures in its fast growing and emerging region operations in 2016.
In addition to the restructuring hit, Compass said that if currency exchange rates continue, its underlying operating profit will take a GBP6 million hit, while its reported revenue will be dragged down by GBP154 million.
Compass said organic revenue growth in the third quarter to the end of June was 5.1%, slightly slower than the 5.5% growth it registered in the first nine months of the year, with strong business wins in North America and good growth in Europe and Japan offset by a more subdued environment in its fast growing and emerging markets business and in its offshore and remote business.
Trading in North America continues to be strong, Compass said, with organic revenue growth in the third quarter of 7%. Nine-month organic revenue in the region grew 7.8%. Compass said it saw strong growth across sectors in the region, though this was offset by weaker activity from its oil and gas clients. Margins in the regional operation continued to improve, however, and have increased by five basis points in the nine months.
Compass said the trends seen in its Europe and Japan operations in the first half accelerated in the third quarter, with organic revenue growth hitting 1.8%, ahead of the 1.2% growth for the company in the first nine months. This was driven by improving performances in several countries, particularly in the UK and Spain, and helped increase margins in the operation by 10 basis points for the first nine months.
Organic revenue from its fast growing and emerging markets business was up by 6.8% in the quarter and by 7.4% in the first nine months. Good net new business wins in the quarter were partially offset by weakness in Brazil and Turkey, the company said. Operating margins in the division deteriorated by 10 basis points, however, due to margin pressures coming from its oil and gas and mining client base, particularly in Australia.
Analysts were split in their reactions to the Compass update. Wyn Ellis, an analyst at Numis, said the structural growth opportunities for the company still look attractive, as does its cash-generative business model. "Whilst concerns about emerging markets and potential currency headwinds persist, however, it is difficult to see a near-term catalyst for the shares," Ellis added, though he said Numis still considers Compass to a "high-quality core investment".
Anna Barnfather, an analyst at Panmure Gordon, however, said that with no new guidance on future cash returns and with volume growth still underwhelming, there is downside risk for Compass shares in the near term.
Tim Barrett, an analyst with Japanese bank Nomura, agrees with Barnfather's more downbeat assessment, saying markets are likely to be "unnerved" by the flat margin predictions, though he too said the structural growth story for Compass remains intact.
By Sam Unsted; [email protected]; @SamUAtAlliance
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