ii view: Compass full-year sales estimate points north

A recovery from the pandemic at this global caterer, plus new business growth fuelled by more first-time outsourcers. Buy, sell, or hold?

Third-quarter trading update to 30 June

• Organic revenue growth of 43.4%
• Underlying revenue at 109% of 2019 revenues
• Underlying operating profit margin up 0.4% to 6.2% from 5.8% during the half year

Guidance:

• Expects FY organic revenue growth of around 35%, up from around 30%

ii round-up:

Global catering company Compass (LSE:CPG) today reported growth in quarterly sales which beat City estimates as it continued to recover from pandemic lockdowns and restrictions. 

Third-quarter revenues grew by 43.4% year-over-year, ahead of analyst estimates for nearer to 31%, and pushing overall revenues to 109% of their 2019 pre-pandemic levels. The rise in sales, up from first half growth of 37.9%, also underpinned an upgrading in management’s expected full-year organic revenue growth to around 35% from a previous 30% forecast. 

Compass shares rose by more than 2% in UK trading having come into this latest announcement up almost 12% year-to-date. Shares for catering rival Sodexo (EURONEXT:SW) are down by around 2% during 2022, while the FTSE All-Share index has retreated almost 4%.

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Revenues for all three of Compass’ geographical regions, including its biggest North American segment, are now above 2019 levels, with management particularly pleased with the strength of sales for its biggest customer segment Business and Industry. Group customers include Shell (LSE:SHEL), Microsoft (NASDAQ:MSFT), Nike (NYSE:NKE), and HSBC (LSE:HSBA).

Net new business growth of 6.9% during the quarter is more than double its historical rate of 3% and continues to be driven by increased first time outsourcing. 

Bolt-on acquisitions now total a net £223 million year to date, while £237 million of its current £500 million share buyback programme has now been executed.

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Full-year results are scheduled for 21 November. 

ii view:

Separated out of the former media company Granada in 2001, Compass Group today typically serves around 5.5 billion meals per year to staff of around 55,000 global clients across more than 40 countries. Foodservices accounts for four-fifths of sales with the balance made up of support services. 

Business and Industry such as corporate HQs or factory canteens generates its biggest slug of sales at just under a third, followed closely by Healthcare and Senior Living such as hospitals and elderly care facilities. Geographically, North America accounts for around three-fifths of sales. 

For investors, elevated inflation feeding into group costs, and including food and staff wages, needs to be considered. Supply chain challenges more broadly and in the wake of the Covid crisis persist, while the post pandemic trend of working from home has likely taken some of its former custom.  

On the upside, the recovery from the pandemic is about complete, and management continues to highlight significant global structural growth opportunities, with just under half the worldwide food services market still self-operated. Bolt-on acquisitions are being made, while shareholder returns remain in focus with a share buyback programme ongoing. In all, given its alignment to the provision of food in what are highly uncertain economic times, and with the share price enjoying positive momentum, there's clearly enough in the story to keep investors happy.

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:

Buy