ii view: shares wobble after Compass disappoints

Full-year results to 30 September

• Adjusted revenue up 19% to £31.3 billion
• Adjusted operating profit up 30% to £2.12 billion
• Final dividend of 28.1p per share
• Total dividend for the year up 37% to 43.1p per share
• New $500 million (£410 million) share buyback programme
• Net debt up 22% to £3.65 billion

ii round-up:

Global caterer Compass Group (LSE:CPG) today detailed profits broadly in line with City forecasts but pointed to a marginally disappointing estimate for the year ahead.

Full-year adjusted sales to the end of September climbed 19% to £31.3 billion, pushing adjusted operating profit up 30% to £2.12 billion. High single-digit organic revenue growth for the year ahead is expected to help fuel adjusted profit growth towards 13%. But that’s below European rival Sodexo’s estimate for a 16% improvement. 

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Shares in the FTSE 100 company fell by more than 3% in UK trading having come into this latest news up around 10% year-to-date. Sodexo (EURONEXT:SW) is up nearer 15% while the FTSE 100 index is little changed in 2023. 

Compass serves around 5.5 billion meals per year to staff in around 55,000 global customer locations, although was forced to close many of its operations during the pandemic. 

Cash generation of £1.8 billion over the year helped it declare a final dividend of 28.1p per share, taking the total payment for the year up 37% to 43.1p per share, and underwrite a new $500 share buyback (£410 million) programme. 

New business signed over the year totalled £2.7 billion, with first-time outsourcing accounting for around half of that. Client retention stayed strong at 96.5%, while bolt-on acquisition expenditure hit £304 million and included several mainly UK and US companies.

Group net debt rose by just over a fifth year-over-year to £3.65 billion, but with its ratio of adjusted profit (EBITDA)-to-net debt falling to 1.2 times from 1.3 times last year. 

A first-quarter trading update is scheduled for 8 February. 

ii view:

Separated out of the former media company Granada in 2001, Compass Group today operates across five areas: Business and Industry, Education, Healthcare and Senior Living, Sports and Leisure, and Defence, Offshore and Remote. Geographically, North America accounts for its biggest slice of sales at around two-thirds, followed by Europe at 22.5% and the Rest of the World the balance of around a tenth. Group clients have included the likes of Shell, Microsoft, Nike, and HSBC. 

For investors, comparatives have become tougher given its emergence from the global pandemic. Costs such as food, a major group expense, remain elevated. Group net interest costs have risen, currency moves can impact, while the tough economic backdrop cannot be ignored. 

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On the upside, a desire by its corporate customers to reduce costs remains given robust client retention and ongoing new business wins. Compass has previously highlighted global structural growth opportunities, with just under half the worldwide food services market still self-operated, while shareholder returns remain a focus given a renewed share buyback programme and forecast dividend yield of around 2%. 

In all, and given Compass’s alignment to the provision of food in what are still uncertain economic times, scope for continued longer-term progress looks to remain. 

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