ii view: caterer Compass grows revenue but shares drop

Shares in this FTSE 100 company have comfortably outpaced the wider index year-to-date but is the party over? We assess prospects.

Third-quarter trading update to 30 June

• Organic revenue up 15%
• Full-year guidance unchanged

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ii round-up:

Global caterer Compass Group (LSE:CPG) today reported further revenue growth after stripping out acquisitions, despite overlapping year-ago comparatives where canteens had already reopened following the pandemic. 

Third-quarter organic revenues to the end of June rose 15%, broadly matching City forecasts, although that was down from the 25% growth seen in the prior second quarter. 

Shares in the FTSE 100 company fell by more than 4% in UK trading having come into this latest news up by around 10% year-to-date. That’s similar to European rival Sodexo (EURONEXT:SW) and ahead of a less than 1% gain for the FTSE 100 index itself during 2023.

Compass serves around 5.5 billion meals per year to staff in around 55,000 global customer locations, although was forced to close many of its operations during the pandemic. 

Revenues for its biggest North American region accounting for around two-thirds of overall sales grew by 14% during the period. In October, given the size of US generated sales and earnings, Compass will move to report in US dollars from the current pounds sterling. 

European revenues, accounting for just over a fifth of overall sales, climbed 17% while the balance for the Rest of the World grew by 20%. 

Compass reiterated its full year expectations for organic revenue growth of around 18% and for its underlying profit margin to come in at between 6.7% and 6.8%. That’s up from 2022’s 6.2%. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares following the announcement, highlighting an estimated fair value price of £22 per share.  

ii view:

Separated-out of the former media company Granada back in 2001, Compass Group today employs around half a million people. Conducting business in around 40 countries, it operates across the five arenas of Business and Industry, Education, Healthcare and Senior Living, Sports and Leisure, and Defence, Offshore and Remote. Group clients include the likes of Shell, Microsoft, Nike, and HSBC. 

For investors, more difficult comparatives now sit ahead given the prior timing of countries reopening’s following the global pandemic. Costs such as food, a major group expense, remain elevated, pressure for staff wage rises across businesses generally persists, while the tough economic backdrop could still hinder. 

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More favourably, a desire by companies to cut costs appears to persist, with client retention strong and new business wins being made. Compass has previously highlighted global structural growth opportunities, with just under half the worldwide food services market still self-operated, while shareholder returns remain a focus its share buyback programme ongoing and an estimated future dividend yield in the region of 2%. 

On balance, and given the group’s alignment to the provision of food in what are still highly uncertain economic times, grounds for continued patience look to remain. 

Positives: 

• Diversity of both customer and geographical location
• Structural growth opportunity 

Negatives:

• Food costs can be volatile
• Currency movements can impact

The average rating of stock market analysts:

Strong hold