ii view: sport helps caterer Compass beat forecasts

Some customer sectors are generating sales in excess of pre-Covid 2019 levels. Buy, sell or hold?

Fourth-quarter trading update to 30 September 2021

• Expects revenue to be about 86% of the same period in 2019
• Expects underlying profit margin to be around the middle of its 5.5% to 6% guidance

ii round-up:

Canteen provider Compass Group (LSE:CPG) pointed to improved attendance at sporting events and the return of education as reasons for lifting its expected final-quarter sales to a level above its prior forecast.   

Fourth-quarter revenues are now expected to come in at 86% of those achieved in the pre-pandemic final quarter of 2019 – ahead of its previous forecast of between 80% and 85%. Sales for the full year to the 30 September are guided to hit 76% of those achieved in 2019.

Compass Group shares drifted around 1% lower in afternoon UK trading, having gained by almost 50% since Covid market lows in March 2020. The wider FTSE 100 index is up around 40% over that time. Shares for French catering rival Sodexo (EURONEXT:SW) are up by under 30%.

Its services to healthcare, defence, offshore and remote sector customers had proved resilient throughout the pandemic and continued to trade above 100% of 2019 revenues during the fourth quarter.

Services to business and industry matched management’s more cautious expectations, with staff at many businesses working and eating at home rather than at the office canteen.

The fourth-quarter profit margin is guided to come in at around the mid-point of its prior 5.5% to 6% estimated range, aided by cost control and the adaption of operations according to changing customer requirements. 

The full-year 2021 operating margin is expected to be around 4.4%. That’s up from the Covid hindered 2.9% during 2020, although still down from 7.4% in 2019’s. 

Currency headwinds are expected to reduce annual revenue and operating profit by around £943 million and £29 million respectively. Full-year results are scheduled for 23 November. 

ii view:

Compass is arguably both defensive and diverse. It normally serves over five billion meals per year across more than 40 countries. Business and industry customers account for its biggest segment, followed by healthcare, then education. 

Early in the Covid crisis, Compass moved to raise £2 billion to strengthen its balance sheet and reduce debt. It also halted the dividend payment, bringing an enviable record of 16 consecutive years of payment increases to an end. 

For investors, Covid uncertainty remains. Outlook caution regarding its biggest segment - business and industry - cannot be ignored. Food prices, a core cost, can also vary and the dividend payment remains suspended.

But sequential improvements in both revenues and the profit margin do offer some reassurance. Management also continues to underline the significant structural market opportunity. In all, and with the shares trading at a discounted valuation to their five-year pre-Covid average and analysts estimating a fair value price of over £16, investors may find them a more attractive holding for the long term. 

Positives: 

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

Negatives:

• Food costs can be volatile
• Covid-19 could result in more staff permanently working from home 

The average rating of stock market analysts:

Buy