ii view: Compass capitalises on outsourcing opportunities

First-half results to 31 March

• Adjusted revenue up 8.5% to $22.6 billion (£17 billion)
• Adjusted operating profit up 11.6% to $1.63 billion (£1.22 billion)
• Interim dividend up 9.2% to 22.6 US cents
• Net debt up 22% to from late September 2024 to $6.6 billion

Guidance:

• Continues to expect full-year 2025 organic revenue growth of more than 7.5%
• Continues to expect high single digit growth in adjusted operating profit over the full-year 2025

Chief executive Dominic Blakemore said:

“We have a diverse sector portfolio, wide-ranging client base and significant local purchasing scale. Although not immune to macroeconomic pressures, we are confident in the resilience of our business model, strength of our value proposition and ability to capitalise on outsourcing opportunities.”

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ii round-up:

Compass Group (LSE:CPG) today reported results that broadly matched City forecasts, with the canteen provider maintaining full-year 2025 forecasts for growth in sales and profits.

First-half adjusted sales to the end of March climbed 8.5% to $22.6 billion (£17 billion), driving adjusted operating profit up 11.6% to $1.63 billion. The Surrey headquartered company continues to expect revenue growth of more than 7.5% for the fiscal year to late September to fuel high single digit growth in adjusted operating profit. 

Shares in the FTSE 100 company fell 2% in afternoon UK trading having come into these latest results up by around 12% over the last year. That’s comfortably ahead of a 2% gain for the FTSE 100 index. Rival caterer Sodexo (EURONEXT:SW) is down by close to a third over that time.

Compass serves around 5.5 billion meals per year to the staff of thousands of corporate customers around the world, operating across sectors including business, education and healthcare. 

Adjusted sales for North America rose 9.4% to $15.5 billion, with sales for the remaining International business and including the UK, up 5.7% to $7.1 billion.

There was growth in profit margin across both regional businesses, driven by efficiencies and the benefits of greater scale within its countries of operation. Compass exited nine countries in 2024, including mainland China, Mexico, Chile and Colombia. 

An interim dividend of 22.6 US cents per share is up 9.2% from last year and is payable to eligible shareholders on 31 July. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results. A third-quarter trading update is scheduled for 22 July. 

ii view:

Started in 1941, Compass today employs over 500,000 people. Business and Industry generated its biggest slug of sales during 2024 at 38%. That was followed by Healthcare & Senior Living at 24%, Education 18%, Sports & Leisure 14%, and Defence and Offshore the balance of 6%. Group clients do or have included the likes of Microsoft, Shell, HSBC and Nike. 

For investors, costs such as staff wages and food have risen. A share price-to-net asset value above the three-year average may suggest the shares are not obviously cheap. Currency moves can hinder performance, while group financing costs increased to $157 million from $131 million a year ago given higher net debt.  

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To the upside, first-time outsourcing accounted for 45% of new business wins during this latest period. Increased geographical focus is being driven. Bolt-on acquisitions of $284 million during the half-year continue to support growth, while a focus on shareholder returns leaves the shares on a forecast dividend yield of close to 2%.  

In all, and despite ongoing risks, growth opportunities and the company’s alignment to the provision of food in uncertain economic times, look to leave the outsourcer justifying its place in long-term investor portfolios.  

Positives: 

• Diversity of both customer and geographical location
• Client retention rate above 96%

Negatives:

• Food costs can be volatile
• Currency movements can impact

The average rating of stock market analysts:

Strong hold