Compass Group plc (CPG) Ordinary 11.05p
HL comment (8 February 2024)
Compass Group's organic revenue rose 11.7% in the three months to the end of December. There was "strong" growth across all regions and like-for-like (LFL) volume was better than expected.
The group spent a net amount of $352m on acquisitions in the quarter, as it continues to "reshape" the portfolio. Compass has also agreed to acquire UK-based catering specialist CH&CO for about $600mn. CH&CO has annual revenues of around $570mn.
Compass acknowledged continued macroeconomic uncertainty, but said full year guidance remains unchanged. This includes underlying operating profit growth "towards" 13%.
The shares rose 2.4% following the announcement.
Catering supplier Compass is dishing up servings of business-as-usual. Full year guidance remains on track, and it continues efforts to snap up low-risk acquisitions.
Compass 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 this 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' 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.
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 $500mn 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.
Environmental, Social & Governance Risks
Consumer services companies are medium-risk in terms of ESG, and very few companies are excelling at managing them. That leaves plenty of opportunity for forward-thinking firms. The primary risk-driver is product governance. The impact of their products on society, labour relations and environmental concerns are also key risks to monitor.
Compass Group's overall management of material ESG issues is strong according to Sustainalytics. However, ESG reporting is not in accordance with leading reporting standards. The Group is a significant employer with strong health and safety policies in place but Sustainalytics has identified minor controversies and called out talent recruitment as an area for improvement. There's also a broad set of sustainable food supply policies in place with measurable and ambitious targets in pace.
Compass key facts
Forward price/earnings ratio (next 12 months): 21.7
Ten year average forward price/earnings ratio: 21.7
Prospective dividend yield (next 12 months): 2.3%
Ten year average prospective dividend yield: 2.3%
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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