Compass Group plc (CPG) Ordinary 11.05p
HL comment (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.
The shares rose 8.2% following the announcement.
With employees back in office, students returning to in-person learning and sporting events filling up, Compass has reaped the rewards. Revenue has all but recovered to pre-pandemic levels and shareholders are being rewarded with the return of an interim dividend and share buybacks.
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 has helped close the gap left by the pandemic. Around 15% of base volumes have yet to return. If they rebound as expected, this could suggesta sizable upside ahead even without the benefit of new contracts although of course there are no guarantees.
The recovery story isn't quite done and dusted though. Sales are back up, but we're waiting for margins to follow suit. The group's upped its prices by around 5%, helping to offset rising inflation. Together with cost cutting, margins should remain stable. Impressively the group's on track to exit the year with an underlying operating margin around 7%. That's reliant on volumes pushing forward and there's always a risk the 15% of expected volume recovery stays subdued for longer than expected.
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 ending September 2021 it stands at 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.
Compass key facts
- Price/earnings ratio: 23.5
- Ten year average Price/earnings ratio: 20.5
- Prospective dividend yield (next 12 months): 2.2%
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)
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. 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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