ii view: caterer Compass begins serving dividends again

Record new business wins and estimated global foodservices market of £220 billion. We assess prospects. 

Full-year results to 30 September 2021

• Revenue down 10.2% to £17.9 billion
• Operating profit up 85.4% to £545 million
• Annual dividend of 14p per share (Nil: 2020)
• Net debt down 16% to £2.54 billion

Guidance:

• Full-year 2022 organic revenue growth expected to be between 20% and 25%
• Full-year underlying operating margin anticipated to be over 6%

Chief executive Dominic Blakemore said:

“Looking ahead we are now focused on growth, driven by encouraging market trends and our ability to provide more bespoke, digital and sustainable solutions that meet the evolving needs of clients in a post-pandemic world. The tailwinds from first time outsourcing continue and, combined with our differentiated operating model and investment opportunities, we are in a strong position for growth.” 

ii round-up:

Canteen provider Compass Group (LSE:CPG) today recommenced dividend payments as it continued to emerge from the depths of the global pandemic. 

A full-year payment of 14p per share follows its suspension in the aftermath of the Covid crisis, although is significantly down on the total annual 40p per share paid over the pre-pandemic period in 2019. 

Compass shares rose marginally in UK trading, having gained by almost 50% since pandemic market lows in March 2020. Shares for catering rival Sodexo (EURONEXT:SW) are up by just over 40% in that time, while the broader FTSE 100 index is up just under 45%. 

Revenue for the Covid impacted year to the 30 September fell by 10.2% to £17.9 billion, although improved sequentially over the year on a quarterly basis compared to 2019. Fourth-quarter underlying revenue at 88% of that seen in the last quarter of 2019 compared to just 71% in the first quarter. 

Compass services to healthcare, defence, offshore and remote sector customers such as oil rig workers remained resilient throughout the pandemic. The recovery in services to business and industry had so far proved sedate as many businesses left staff working from home.

Management flagged record new business wins of £2.1 billion, with around half from first time outsourcing and a client retention rate of 95.4%. 

Accompanying full-year 2022 estimates looked for organic revenue growth of between 20% and 25%, along with an underlying operating profit margin of over 6%. That compares to the 5.8% reported in the just gone final fourth quarter. 

An AGM and trading update are both scheduled for 3 February. 

ii view:

Compass normally serves around 5.5 billion meals per year to staff of around 55,000 global clients across more than 40 countries. Business and Industry generates its biggest slug of sales at over one third, followed by Healthcare and Seniors at just under a third and then Education at around a fifth. Foodservices account for four-fifths of sales with the balance made up of support services. North America is by far its biggest geographical region at over three fifths of sales. 

For investors, Covid uncertainty remains, and the pace of recovery at its core Business and Industry division has remained subdued, while costs and inflationary pressures are expected to weigh on the current first half of the 2022 full year. 

But sequential improvements in both revenues and the profit margin over the last year offer reassurance. Restarting the dividend is important to investors. Remember, Compass came into the Covid crisis with an enviable record of 16 consecutive years of payment increases. And don’t overlook management’s mention of significant global structural growth opportunities. Of an estimated foodservice market of £220 billion, just under half is still self-operated. In all, and while some caution remains sensible, a consensus analyst estimated fair value price of over £16 offers room for long-term upside. 

Positives: 

• Diversity of both customer and geographical location
• Restarted the dividend 

Negatives:

• Food costs can be volatile
• Covid-19 could result in more staff permanently working from home 

The average rating of stock market analysts:

Buy