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Compass Group - on track to serve up full-year targets

Compass Group's third-quarter revenues grew by 15% on an organic basis, helped by double-digit increases in all regions.

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Compass Group's third-quarter revenues grew by 15% on an organic basis, helped by double-digit increases in all regions. This has been achieved through a combination of volume and price growth.

Whilst the group noted ongoing high levels of inflation, it also commented that it was making progress on improving its margins.

So far this year Compass has made a net spend of £272m on acquisitions, and repurchased £250m of shares under the current £750m buyback programme.

Compass re-iterated full-year guidance of about 18% organic revenue growth. That's expected to drive operating profit growth towards 30%, when ignoring the effect of currency movements.

The shares fell 2.2% in early trading.

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.

The third quarter has shown a slowdown in growth compared to the start of the year, which the market has greeted with some disappointment. But given this reflects more normalised comparisons following a period of post-covid re-openings, we don't think double-digit revenue growth is a bad result.

Last we heard, Compass estimates only around half of its target market currently outsources their food preparation, and the group commands about 10% of the £250bn food services business. That suggests there's a big slice of pie still up for grabs. And with over half of total revenue coming from non-cyclical sectors, Compass has another layer of shelter against challenging economic conditions.

The group's been keen to point out that it still offers good value against the high street, suggesting that high inflation was helping to increase new business. 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. We're pleased to see continued progress, and the upgraded full-year margin guidance is a testament to the work behind the scenes to manage costs and price hikes.

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. Earlier in the year, Compass guided that net interest costs are likely to jump substantially in the current financial year because of higher average debt levels and interest rates.

Nonetheless, strong cash flows currently cover the dividend and pave the way for a £750m 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. Fair if things go to plan, but any wobbles on margin recovery will likely put the valuation under pressure.

Compass key facts

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.

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 disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 25th July 2023