ii view: record-breaking caterer Compass shares good news

Corporate demand to outsource catering and other services to cut costs is running high. Buy, sell, or hold?

Full-year results to 30 September

• Adjusted revenue up 38% to £25.8 billion
• Adjusted operating profit up 88% to £1.59 billion
• Final dividend of 22.1p per share
• Total dividend for the year up 125% to 31.5p per share
• A new share buyback programme of £250 million

ii round-up:

Global catering company Compass Group (LSE:CPG) today detailed sales and profits which beat City forecasts, with record net new business wins of £2.5 billion coming as companies looked for cost savings in the face of an economic downturn. 

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New outsourcing of services came in at nearly half of overall business wins, helping almost double profit for the year to the end of September to £1.59 billion. The total dividend for the year of 31.5p more than doubled, although a new £250 million share buyback programme for the first half of 2023 proved below some analyst's hopes of up to £1 billion. 

Compass shares fell by more than 1% in UK trading having come into this latest announcement up by 12% year-to-date. Shares for rival caterer Sodexo (EURONEXT:SW) are up by around 15% during 2022, while the FT All World index is down by close to a fifth.

Accompanying management outlook comments from Compass pointed towards adjusted operating profit growth of more than a fifth for 2023, with sales adjusted for acquisitions forecast to grow by around 15% and weighed towards to the first half. 

Sales during the year for its biggest customer segment, Business and Industry, and including Shell (LSE:SHEL), Microsoft Corp (NASDAQ:MSFT), Nike Inc Class B (NYSE:NKE), and HSBC Holdings (LSE:HSBA), came in above pre-pandemic levels and in the wake of major Covid related disruption. 

Geographically, sales in North America, its biggest region and accounting for two-thirds of overall revenues, grew by 53% to over £17 billion. Sales in Europe, its second biggest region, rose by almost 28%, with rest of the world up 16%.

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

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. It operates across the five areas of Business and Industry, Education, Healthcare and Senior Living, Sports and Leisure, and Defence, Offshore and Remote. 

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For investors, a highly uncertain economic outlook including still rising interest rates is a worry, while elevated costs such as food, a major group expense, and pressure for wage rises also warrant consideration. So does the ongoing pandemic in parts of the world such as China.  

More favourably, a desire by companies to cut costs looks to be playing into the hands of Compass, with client retention, like new business wins, also running at a record of 96.4%. Compass has highlighted many times the global structural growth opportunities, with just under half the worldwide food services market still self-operated, while bolt-on acquisitions to help fuel growth continue to be made. 

On balance, and given its alignment to the provision of food in what are highly uncertain economic times, investors are likely to stick with Compass.

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