First-half results highlighted narrow-moat Compass Group's (CPG) legacy of reliable cash generation, as the company announced its intention to reward shareholders with a £1 billion special dividend. Strengthening of the pound sterling relative to other currencies crimped year-over-year growth in reported revenue by almost 2% to about £8.7 billion in the first half; however, these translation effects masked solid organic growth of approximately 4%. In North America, new account sales kept organic growth around 7% year over year despite flat food-service volume.
In addition, year-over-year sales in emerging markets achieved nearly 10% growth, even as weakness in the Australian mining sector persisted. Year-over-year organic sales declines in Europe and Japan nearly halved to negative 1.6%, as new account wins offset ongoing softness in food-service volume. Overall, stronger sales combined with efficiencies gained through recent restructurings offset translation effects to produce 10 basis points of consolidated operating margin improvement to 7.4%.
In light of these results, we are increasing our fair value estimate to £9.30 from £9 primarily to reflect the time value of money since our last update. In our opinion, the shares currently represent a fair price for a company that consistently produces solid results throughout the economic cycle.
Compass' scale and geographic diversity continue to sustain solid cash flows and attractive returns on invested capital, despite the cyclicality of the food-service industry. Although management intends to increase the net debt/EBITDA ratio to 1.5 times in order to partially fund the special dividend, we believe Compass' recurring revenue streams more than adequately support this increase in leverage, while rewarding equity holders through a more optimal capital structure.
