Compass' organic revenue rose 24% in the first quarter, and net new business rose 5.5%. The group's benefitting from companies outsourcing their catering needs. Trends are strong in Business & Industry, reflecting employees returning to offices. Compass saw double-digit like-for-like volume increases in all regions.
The group spent £55m on bolt-on acquisitions in the quarter and completed £163m of the £250m share buyback programme.
Compass still expects full year operating profit growth over 20%, ignoring the effect of exchange rates. However, the group's mindful of "the uncertain macroenvironment and any potential impact on discretionary spending".
The shares rose 1.2% following the announcement.
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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.
Last we heard, 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 currently 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.
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 in-line with 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
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