ii view: Compass continues to disappoint

Shares for this struggling canteen provider are down over a third year-to-date. 

Full-year trading update to 30 September

• Revenue down 19%
• Liquidity around £5 billion

Management said:

“We are pleased with our progress in the quarter and that the business is now at breakeven at a trading level.  We continue to proactively manage the business, reducing our costs, rebuilding our margins and investing to strengthen our competitive advantages.  However, the pace at which our revenues and margins will recover remains unclear, especially given the possible increase in lockdown measures in the Northern Hemisphere through the winter months. 

“Despite the current challenges, when looking further ahead, we remain excited about the significant structural market opportunity globally, and the return to organic revenue growth, margin improvement and returns to shareholders over time.”

ii round-up:

Canteen provider Compass (LSE:CPG) today flagged an expected near one-fifth fall in full-year revenues while expressing caution for the outlook, given the unknown pace at which its Covid-hit sales might recover.

The 36% fall in fourth-quarter sales, despite improving from a drop of 44% in the third quarter, was also marginally shy of analyst expectations. 

Compass shares fell by more than 5% in UK trading and are down by over a third since the start of the year. Shares in rival caterer Sodexo (EURONEXT:SW) have fallen by a little over 40% in 2020.

Although not a surprise to analysts, Compass also took a £100 million charge against non-profitable contracts along with an additional £90 million of restructuring costs. This brings full-year restructuring, or downsizing costs, to £130 million. 

Compass, which employs over half a million people, operates across sectors including business and industry, healthcare, education and defence and offshore. Closed schools and offices under government lockdowns have hit its revenues hard.

Fourth-quarter performance in North America improved as clients in education began to re-open for the school year, and business & industry slowly started to recover. Healthcare remained strong. A similar picture in Europe was also reported. 

Full-year results are scheduled for 24 November.

ii view:

Typically serving over five billion meals per year across more than 40 countries, Compass is generally viewed as both defensive and diverse. In normal times, schools and hospitals are unlikely to remove their food provision services, even if corporate customers sometimes do. But 2020 is no normal year.

An enviable record of 16 consecutive years of dividend increases, underpinned by steady cashflows, has now come to an end. In April, it suspended the dividend under measures to conserve cash. A £2 billion fundraising was then made to strengthen the balance sheet and reduce debt. Total access to liquidity now stands at around £5 billion. 

For investors, a Covid clouded outlook cannot not be overlooked. A call to again work from the office has only recently been reversed by the UK government as virus cases have once more spiked. The non payment of the half-year dividend has also removed a core shareholder attraction. However, management has been taking action, cutting costs and conserving cash where possible. For now, while the current Covid hit share price arguably offers long term opportunity, more cautious investors may wish to re-evaluate later in the year following annual results.   

Positives: 

• Diversity of both customer and geographical location
• Strengthened balance sheet

Negatives:

• Enviable dividend track record ended
• Covid-19 could result in more staff permanently working from home 

The average rating of stock market analysts:

Buy