ii view: Compass launches £2 billion fundraising

Covid-19 is hitting this caterer hard, so strengthening the balance sheet should see it through.

Fundraising and half-year results to 31 March

• Raising around £2 billion via share offering
• Revenue up 1.6% to £12.6 billion
• Adjusted profit down 10% to £854 million
• Withdrew 2020 financial guidance
• No interim dividend payment

Chief executive Dominic Blakemore said:

“The Covid-19 pandemic has had a profound impact on Compass. We can only exist with the commitment of our colleagues around the world, many of whom have been on the front line of the battle against the pandemic.

"Given the uncertainty in the short-term outlook, today we have launched a £2 billion equity raise to reduce leverage and increase our liquidity. A strong balance sheet will allow us to weather the crisis whilst continuing to invest in the business to enhance our competitive advantages, support our long term growth prospects and further consolidate our position as the industry leader in food services.

"Although there are significant short-term challenges, I firmly believe that Compass is now well-placed to succeed in a post Covid-19 world. The strengths which have delivered Compass success in the past are the same ones which will deliver success in the future."

ii round-up:

Canteen provider Compass (LSE:CPG) today launched a £2 billion institutional and retail equity fundraising to strengthen its finances and help see it through the corona crisis. 

Closed schools and offices under government lockdowns led to a near halving in April revenues, with profit for the month down by close to a quarter (23%). Around half of its customer sites were closed under efforts to stop the pandemic. 

Compass shares fell by more than 3% in early UK trading and are down by just over 40% year-to-date. Shares in rival caterer Sodexo (EURONEXT:SW) have fallen by a little over 45% in 2020.

Adjusted profit to the end of March fell by 10% to £854 million, hit by Covid-19 closures in March. 

Like-for-like sales for the five months to the end of February had risen by around 6%. North American sales rose by 8.1%, followed by the Rest of the World up 5.2% and Europe up 0.8%.

Given the degree of uncertainty surrounding government restrictions under the pandemic, management is now offering no financial guidance for 2020. 

Under measures to battle Covid-19, it recently secured a waiver regarding potential breaches of its debt commitments, while it previously announced executive pay reductions and the suspension of dividend payments. 

Total available credit facilities have risen from £2 billion to £2.8 billion. Group net debt will drop to £2.9 billion following the fund raising. 

ii view:

Working in over 55,000 client locations in 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 due to Covid-19, these are not normal times.

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. Now it is raising £2 billion to strengthen the balance sheet, reduce debt and allow it to continue investing in the business. 

For investors, uncertainty now reins in a Covid-19 world. Caution is clearly sensible. But quality businesses such as Compass should eventually regain their dependability, especially when a vaccine helps return the world to a more normal state. As such, current share price weakness may represent a long-term opportunity.   

Positives: 

• Diversity of both customer and geographical location
• Strengthening the 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:

Strong hold