ii view: Compass shares race north as profits surge

This global caterer is putting the pandemic behind it, flagging confidence in the outlook with a new £500 million share buyback programme. We assess prospects.

First-half results to 31 March

• Underlying revenue up 38% to £11.6 billion
• Operating profit up 280% to £638 million
• Adjusted operating profit up 135% to £673 million
• Interim dividend of 9.4p per share (Nil: H1 2021)
• New share buyback programme of up to £500 million

Guidance:

• Expects full-year organic revenue growth of around 30%, up from previous guidance of between 20% and 25%

Chief executive Dominic Blakemore said:

“We are mindful of global inflationary pressures, which have been exacerbated by the tragic events in Ukraine. Although we expect inflation to increase and continue at a heightened level in the medium term, we have a resilient business model to help mitigate this challenge. 

“Inflation also provides a further impetus to outsourcing as organisations seek savings and we are capturing this growth opportunity as demonstrated by our record new business wins.”

ii round-up:

Catering company Compass Group (LSE:CPG) today looked to put the pandemic firmly behind it as it reported adjusted revenue growth above pre-Covid levels.

Adjusted operating profit rose 135% to £673 million, beating City forecasts, with strong growth enjoyed across all sectors. 

Compass shares climbed by more than 10% in UK trading having come into these latest results down just over 4% year-to-date. Shares for catering rival Sodexo (EURONEXT:SW) are down by around 12% during 2022. The FTSE All share index has retreated by almost 5%.

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Compass’s client retention rate proved to be its highest ever. Record new business wins of £2.5 billion over the last 12 months were detailed, while net debt has fallen back to within management’s target range. 

Operating cashflow is up nearly 18% year-over-year and now underwrites a new share buyback programme of up to £500 million. 

Full-year profit margin guidance has been left unchanged, although the organic revenue growth estimate is nudged higher to a possible 30%. That’s up from a previous estimate of between 20% and 25%. 

An interim dividend of 9.4p per share was declared, with the Chertsey headquartered company not paying a dividend this time last year due to the pandemic. 

Its next trading update is scheduled for 26 July. 

ii view:

Separated out of the former media company Granada in 2001, Compass Group today normally 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 generates its biggest slug of sales at just under a third, followed closely by Healthcare and Senior Living. Geographically, North America is its biggest region, accounting for around three-fifths of sales. 

For investors, rising costs, including those for food, don’t help, supply chain challenges persist, and the post pandemic trend of working from home has likely removed some of its former custom.  

That said, the recovery from the Covid crisis 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. The company is paying a dividend again, albeit at a lower level than before the pandemic, with today’s latest payment leaving the shares on a historical yield of around 1.4%. For now, and given its alignment to the provision of food in what are highly uncertain economic times, investors may wish to stay firmly patient. 

Positives: 

• Diversity of both customer and geographical location
• Previously restarted the dividend 

Negatives:

• Food costs can be volatile
• Currency movements can impact

The average rating of stock market analysts:

Strong hold