Third quarter revenue saw organic growth of 43.4%, with underlying revenue now exceeding 2019 levels by 9%. All three regions operated ahead of 2019 levels and so did every business sector, bar Business & Industry which fully recovered toward the end of the period.
Net new business grew 6.9% in the quarter, relative to 2019 levels. That's over double the historical rate of 3% and client retention was seen at 96.1% for the year to date.
Underlying operating margin improved from 5.8% at the half year mark, to 6.2%. Full year guidance for operating margin of 6% remains intact.
Organic revenue growth's expected to be around 35%, up from 30%. Although, pressures from inflation mean the previously expected operating margin exit rate for 2022 of 7% is expected to moderate slightly.
The group completed £237m of the £500m share buyback programme.
The shares rose 2.7% following the announcement.
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Our View
With employees back in office, students returning to in-person learning and sporting events filling up, Compass has reaped the rewards. Revenue hasn't just recovered to pre-pandemic levels, it's pushed beyond.
In normal times, contract catering is attractive. Compass typically uses equipment and facilities owned by the client, so capital requirements are low and generally returns have been strong.
Compass estimates only around half of their target market currently outsource their food preparation, and the group commands a 10% market share in the £220bn food services business. That suggests there's a big slice of pie still up for grabs.
Any concerns that a shift to working from home and changing behaviours would impact trading have been largely put to bed. New business is at record levels, which is helping push performance beyond pre-pandemic levels.
The recovery story isn't quite done and dusted though. Sales are back up, but we're waiting for margins to follow suit. Last we heard, the group upped prices by around 5%, helping to offset rising inflation.
That's not to say inflation isn't having an impact, it certainly is. Compass is very exposed to food and labour costs and that's starting to weigh on margin growth. Previous guidance of a 7% underlying operating margin exit rate for the year is being guided downwards.
Having low margins can be cause for concern. But Compass benefits from huge scale, giving it a strong voice at the table with suppliers and the ability to invest in cost cutting measures that smaller outfits can't. As sales have grown, those benefits have increased.
Compass went into the crisis in relatively good shape. Debt levels crept up over the pandemic, but the group's made good strides to bring it back down. At the half-year mark, net debt was 1.3 times cash profits, now within the long-term target of 1-1.5 times.
Overall, we think Compass is an attractive business, and the pandemic forced costs to take centre stage. But the group's above-average valuation takes this into account. That's fair if things go to plan, but any wobbles on margin recovery will likely put the valuation under pressure and there are no guarantees.
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.
Half Year Results (Organic unless otherwise stated, 11 May 2022)
First half underlying revenue came in at £11.6bn, an organic increase of 37.9% and 99% of pre-pandemic levels. That reflected growth across all business segments, record new business and the impact of easing covid restrictions.
Operating profit more than doubled to £673m, reflecting higher revenue.
Full-year guidance has been raised, with organic revenue growth now expected around 30%. Despite inflationary pressures, underlying operating margin is expected to remain in line with expectations of above 6%.
The board announced a 9.4p interim dividend and a £500m share buyback, due to be completed this calendar year.
North America revenue more than doubled to £7.7bn, up 37.9%. Every sector's now trading above or around pre-pandemic levels, except Business & Industry. Net new business grew 8.2% with strong flows into Business & Industry and Sports & Leisure. Underlying operating profit increased from £242m to £535m as margins benefited from increased volumes.
In Europe, all sectors traded ahead of pre-pandemic levels except the largest, Business & Industry. Revenue grew by 28.3% to £2.8bn, 90% of pre pandemic levels. In March, the group exited the Russian market which contributed 0.1% to overall revenue last year. Underlying operating profit rose from £32m to £125m. Inflation was offset through cost controls, pricing, and higher volumes.
Rest of World revenue grew 9.6% to £1.2bn, reflecting 90% of pre-pandemic levels. The Defence, Offshore & Remote sector continued its resilient performance, whilst Business & Industry was impacted by lockdowns in Japan. Underlying operating profit rose from £53m to £56m.
Underlying free cash flow was broadly flat at £360m, adjusted for £33m paid for resizing programmes and £3m in acquisition costs. Net debt was broadly flat at £2.5bn, the ratio of net debt to cash profits (EBITDA) stands at 1.3 times, back within the group's target range of 1-1.5.
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.
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