Compass reports stellar growth

Contract caterer Compass (CPG) achieved stellar growth in the year to 30 September 2023. Organic sales jumped by 19 per cent, while underlying operating profits shot up by 30 per cent to £2.1bn. The FTSE 100 group attributed its success to a combination of volume and pricing growth, which both sat at roughly 7 per cent. Operating leverage also helped to boost profit margins from 6.2 per cent to 6.8 per cent, successfully offsetting the mobilisation costs new projects inevitably incur.

Compass achieved underlying double-digit growth in North America and Europe, and demand was strong across all sectors. The business and industry division benefited from the continued return of workers to the office, for example, while a flurry of sporting fixtures boosted the leisure division. 

As well as keeping hold of old clients – Compass reported a client retention rate of 96.5 per cent – the caterer also mobilised net new business of 4.6 per cent, comfortably above its historic average of 3 per cent. It seems that plenty of organisations are still looking to outsource their culinary problems, therefore, as cost pressures persist.

Why, then, did Compass’s share price fall by 5 per cent in the immediate aftermath of its results? One answer relates to its outlook for FY2024. Management said volume growth started to normalise in the second half of 2023, and progress is due to slow down further next year, with underlying operating profits only expected to rise by 13 per cent. This will be delivered through “high single-digit” organic revenue growth and more progress on margins.

Meanwhile, underlying finance costs are expected to increase to $225mn (£180mn), up from £136mn this year (Compass is changing its reporting currency from sterling to US dollars, as about three-quarters of its underlying operating profit comes from North America). Over £1bn of borrowings now appear among Compass’s current assets, suggesting there will have to be plenty of refinancing to be done in the coming months, adding a level of uncertainty. 

Ultimately, however, we remain bullish about Compass’s prospects. Against a tough economic backdrop, it is growing its client base and widening its margins and, although its debt is likely to become more burdensome next year, the group remains very cash-generative. Its valuation is also fairly appealing: the caterer is trading on a forward price/earnings ratio of 20.7, compared with a five-year average of 24.4. Buy.