Compass returns to profitability

As one might expect with a contract caterer, this year has been an exercise in damage limitation. Compass Group (CPG) registered a 77.8 per cent fall in underlying earnings for FY2020, while organic revenue at the catering heavyweight was down 18.8 per cent year on year, despite resilient trading in North America.

You would be hard pressed to identify an industry as badly hamstrung by the Covid-19 lockdowns, evidenced by the closure of around half of Compass's business units over the course of a fortnight in March. After the initial jolt to the system, business volumes picked up gradually through the summer, returning to profitability and a cash-neutral position in the fourth quarter, largely thanks to contract renegotiations to reflect the difficult trading environment. Going forward, the group wants to boost flexibility within its operating model, presumably with an eye on reducing fixed-cost obligations, given that “the scope for growth from first-time outsourcing and share gains is significant”.

Management was proactive in shoring up the cash position, with a £1.97bn equity raise coupled with £800m of additional committed and undrawn credit facilities. Consequently, group liquidity doubled to £4.79bn. By the period end, net debt was equivalent to 2.1 times cash profits, although it would have only been slightly in advance of the upper end of the target multiple of 1.0-1.5 without the inclusion of lease liabilities under the IFRS 16 accounting standard.

Success on the vaccination front will certainly improve trading prospects, but the central consideration is the extent to which the group’s diverse end markets will be permanently impacted by changes brought about by the pandemic. Hold.  

Last IC View: Hold, 1,114p, 20 May 2020