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Compass Group - solid growth but the bottom line misses forecasts

Derren Nathan | 20 November 2023 | A A A

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Compass Group plc Ordinary 11.05p

Sell: 2,051.00 | Buy: 2,053.00 | Change -11.00 (-0.53%)
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Compass Group has reported full- year revenue of £31.3bn, with organic growth of 18.8% balanced across all regions and sectors when ignoring the impact of currency movements. Both selling prices and volumes were up by 7%, whilst revenue from new business increased by 5%.

Underlying operating profit was up 29.6% to £2.1bn, ignoring the impact of exchange rates. This reflecting strong cost control and an ability to pass inflation onto its customers. This helped drive free cash flow up from £0.8bn to £1.2bn. Net debt grew by £0.7bn to £3.7bn.

Earnings per share 75.4p came in a little below analyst expectations due to higher-than-expected tax and interest charges.

Compass returned around £1.6bn to shareholders over the year and has raised its final dividend to by 27.1% to 28.1p., with a further $500m buyback has been announced.

Guidance for the new year pointed to high single-digit organic revenue growth, with operating profit growth expected to rise towards 13%.

The shares fell 4.95% following the announcement.

View the latest Compass share price and how to deal

Our view

Compass is a catering supplier. It feeds hungry mouths everywhere from stadiums to university halls and offices. It's a natural beneficiary of companies looking to outsource their food offerings (a classic move when economic conditions get tough). As more people return to offices, Compass is reaping rewards there too.

After a very strong 2023, growth is set to slow next year. But given this reflects more normalised comparisons following a period of post-covid re-openings, we don't think high single digit revenue growth is a bad outlook nor does it look too demanding.

Compass estimates only around half of its target market currently outsources their food preparation, and the group commands less than 15% of the £300bn food services business. That suggests there's a big slice of pie still up for grabs. And with about half of total revenue coming from non-cyclical sectors, Compass has another layer of shelter against challenging economic conditions.

Compass's scale means that it can provide customers with a level of certainty around their catering costs whilst maintaining high standards of quality and safety. As such, the inflationary environment has helped accelerate new business wins. The downside of inflation of course is the impact on margins.

Compass has been pulling all the levers it can to mitigate inflation. As well as price increases, menu management and a focus on where it buys its ingredients and equipment are some of the tools it has at its disposal. That's helped margins to progress over 2023 and there should be more to come this year.

While debt levels are within the Group's target range, they've been rising in absolute terms, but have come down relative to the improving business performance. There's a decent chunk of debt due to mature next year, so that'll either be a burden on cash or need to be rolled over at higher rates.

Nonetheless, strong cash flows currently cover the dividend and pave the way for a further $500m extension to the buyback. Given the improvement in profitability, we're comfortable with this level of cash returns to shareholders. As ever there are no guarantees.

Overall, we think Compass is an attractive business, with external conditions creating something of a perfect storm to boost demand for outsourcing. That's earnt it a valuation towards the top of its peer group. That means the shares could be sensitive to disappointments. Compass wouldn't be totally immune to an economic downturn, and whilst there are some signs of an improving outlook it's too early to declare we're out of the woods.

Compass key facts

  • Forward price/earnings ratio (next 12 months): 20.7
  • Ten year average forward price/earnings ratio: 21.7
  • Prospective dividend yield (next 12 months): 2.4%
  • Ten year average prospective dividend yield: 2.4%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.