As a result of the COVID-19 outbreak Compass expects organic revenue growth to be between 0% and 2% for the half year. As a result, operating profit is expected to be £125m - £225m lower than previously expected.
The business is working to protect cash flow, and has "significant headroom" before it risks breaching its agreements with creditors. The group has a £2bn credit facility that could be drawn on if needed.
The shares fell 19.9% following the announcement.
In normal times, contract catering is 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 nearly 20%.
But we're not in normal times. The coronavirus outbreak has significantly impacted the business in Europe and North America. It's a testament to resilience of the group's revenues that they are still expecting some organic growth.
A broad customer base that ranges from the Ministry of Defence to luxury watchmaker Patek Philippe is the key here. However, if the disruption caused by COVID-19 is sustained, nothing can be guaranteed.
Longer term, demand for Compass' services has been 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.
The group had generally been performing well, with organic growth in most areas. There were weak spots, and management were cautious about the future, especially in Europe. Lower consumer confidence and higher costs had been denting performance, and remedial action was proving unexpectedly expensive.
More concerning, in our view, was the write down of contracts the group now see as 'structurally loss making' in a tougher economic environment. Underpricing contracts to win business has been the bane of many an outsourcer, and while there's no evidence this is a systematic problem at Compass Group it's something we will be keeping a close eye on.
There aren't many stocks that can match Compass' record of dividend growth and offer the prospect of additional capital returns. However, the coronavirus situation is unprecedented in modern times, so there's no way to know for sure how the next few months will play out. That's reflected in the share price, which had fallen to trade on a PE ratio of 12.4 times prior to today's update - well below the long term average of 17.3. The shares offer a prospective dividend yield of 3.9%, but investors should keep in mind that coronavirus could make current plans untenable.
Compass confirmed that in the five months until the end of February organic revenue growth was 6%, as measures to contain the virus in the Asia Pacific region did not materially impact the business. Operating margins increased by 0.1 percentage points, reflecting the results of the restructuring programme in Europe.
However, due to the containment measures introduced in Continental Europe and North America, the "vast majority" of Sport & Leisure and Education businesses in these regions have now been closed. Business & Industry volumes have also been "severely impacted".
The group is monitoring the situation and will provide further updates in its half year results on 13 May.
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