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Compass Group - Better than expected growth

Nicholas Hyett | 25 July 2019 | A A A
Compass Group - Better than expected growth

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Compass Group plc Ordinary 11.05p

Sell: 1,704.50 | Buy: 1,705.00 | Change 56.00 (3.41%)
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Compass reported organic revenue growth of 6.3% in the third quarter, driven by strength in North America and Rest of World. Margins are in line with last year. With organic growth for the year to date at 6.5% the company has said that it now expects full year growth to be at the top end of its 4-6% guidance.

The shares rose 3.6% in early trading.

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Our View

Contract catering is intrinsically attractive. Since Compass typically uses equipment and facilities owned by the client, capital requirements are low and returns are strong. The result is a return on capital employed of over 20%.

That helps generate healthy cash flows, which have in turn seen the group grow its ordinary dividend every year since the start of the century. Compass has also paid significant sums in share buybacks and special dividends, although of course there are no guarantees this will continue.

The group is generally performing well, with organic growth in most areas. But there are weak spots, notably 'Offshore & Remote'. The division supplies mining and oil companies, sectors that have pulled in their horns in recent years as lower commodity prices hit home. Restructuring the division has helped cut costs, but it's still not flourishing.

Longer term, demand for Compass' services is driven both by economic growth and the ongoing trend toward greater adoption of outsourced catering solutions, which has seen substantial increases in the addressable market.

A broad customer base that ranges from the Ministry of Defence to luxury watchmaker Patek Philippe means revenues should prove resilient. The group is also targeting margin gains through its Management and Performance plans, which seeks to minimise unit costs.

There aren't many stocks that can match Compass' record of dividend growth and offer the prospect of additional capital returns. That's reflected in the share price though, with the prospective dividend yield at 2.3% next year  and a price to earnings ratio of 22.2. That's well above the long run average of nearer 17.

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Compass Group Results

North America organic revenues rose 8.5% in the third quarter, with good new business wins across all sectors and sales benefitting from sporting events. Margins were consistent with last year.

Organic revenue growth slowed to 1.9% in Europe during the quarter, as the group lapped significant UK defence contracts won last year. However volumes have continued to weaken in the UK, France and Germany, with margins also falling.

Rest of World saw revenues rose 3.2% during the quarter, with margins improving on last year as the group increased prices and improved productivity.

Compass made £100m of bolt on acquisitions during the quarter, and agreed the acquisition of Fazer Food Services for EUR475m in June - subject to regulatory approval. The net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) target remains unchanged at 1.5 times.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.