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Compass Group - revenues well ahead as margins expand

Compass Group has reported full year underlying revenue of ?25.8bn, up 5.4% over pre-pandemic levels.

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Compass Group has reported full year underlying revenue of £25.8bn, up 5.4% over pre-pandemic levels. Growth accelerated in each quarter of the year, with the fourth quarter up 15.9%, with strong growth present across all business segments.

Underlying operating profit was up 87.5% over last year to £1.6bn, ignoring movements in exchange rates. That's a margin of 6.2%, up from 4.5% last year despite inflationary pressures and the costs of bringing on new customers. However, margins were below the 7.4% seen in 2019.

Underlying free cash flow improved from £660m to £890m and Compass returned £843m to shareholders in dividends and share buybacks.

Net debt increased by £452m to £2,990m, that's 1.3 times cash profits and in the middle of the Group's target range.

Compass intends to pay a final dividend per share of 22.1p which brings the full year total to 31.5p, an increase of 125%. An initial £500m share buyback has been completed with a further £250m announced today, to be completed in the first half of the financial year.

For 2023, Compass is looking to achieve organic revenue growth of about 15%. It expects underlying operating growth to be north of 20%, ignoring exchange rate movements, with a margin above 6.5%.

The shares were down 4.1% following the announcement.

View the latest Compass share price and how to deal

Our View

By the mid-point of the 2022 financial year, Compass had nearly closed the revenue gap with pre-pandemic levels. By the end of the year, underlying revenues for all segments had well and truly shrugged off the challenges being seen by the wider economy.

Importantly, the fourth quarter also saw "Business & Industry" exceed 2019 levels. That's the Group's largest segment at just under a third of underlying revenues. If it can maintain this momentum, it means the rest of the business doesn't need to work as hard to achieve Compass's growth targets.

Despite difficult economic conditions, volume increases drove about a third of growth in 2022 but it's new business growth that's providing the Group with confidence for the future. New business over the last year grew 5.7% against pre-pandemic levels, higher than historical growth rates of about 3%.

There are structural drivers that can help this growth continue. Increasing regulation, labour shortages and supply chain issues are amongst the factors that are fuelling an increased demand for outsourcing.

Compass estimates only around half of its target market currently outsource their food preparation, and the group commands about 10% of the £220bn food services business. That suggests there's a big slice of pie still up for grabs. And with over half of revenues coming from non-cyclical sectors Compass has another layer of shelter against worsening economic conditions.

Compass was 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 is 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 in its armoury. For now, Compass is being cautious as to how much further it can improve margins beyond 6.5%, noting that many of the factors are out of its control.

Debt levels are within the Group's target range, but have been on the increase. 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.

The dividend is well covered by cash flows, but of course can never be guaranteed. It remains to be seen if share buy backs will be paused beyond the recent £250m extension to the current programme. But we would like to see some more focus on debt reduction going forward. This would also leave the Group better equipped to continue its focus on selective bolt on acquisitions, adding to the £268m it spent in 2022.

Overall, we think Compass is an attractive business, with external conditions creating something of a perfect storm to boost demand for outsourcing. The Group's valuation is close to the long-term average. That's fair if things go to plan, but any further 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: 21st November 2022