- £750mn share buyback
- Organic sales growth of 25 per cent
Compass Group (CPG) has upgraded its profit guidance after a strong six months of trading. The contract caterer now thinks it will achieve operating profit growth of almost 30 per cent in financial year 2023, compared with its previous target of “above 20 per cent”. Meanwhile, organic revenue growth is expected to reach 18 per cent, and operating margins are due to be marginally higher than anticipated at 6.7-6.8 per cent.
The group’s confidence is underpinned by a strong performance across the board. All sectors and regions achieved double-digit organic sales growth in the six months to March 2023, and net new business growth was also well balanced, with every region growing in the range of 5-6 per cent. This is significantly higher than Compass’s historical growth rate of 3 per cent, and eases concerns that the office catering division would struggle in the wake of Covid.
Compass chief executive Dominic Blakemore believes outsourcing trends are working in the group’s favour despite “pockets” of macroeconomic weakness. “We believe that many of the complexities that drive outsourcing, such as increased regulation, changing client and consumer expectations, and inflation, are here to stay,” he said.
Strong demand is translating into excellent profit growth. Adjusted operating profit jumped by 41 per cent year on year to £1.05bn – way above pre-pandemic levels. Statutory figures were dampened by a £70mn charge relating to portfolio restructuring and £61mn of acquisition-related costs. However, profit growth was still impressive at 37.6 per cent.
This, in turn, translated into excellent cash generation: free cash flow reached £590mn in the first half of 2023, compared with £360mn in the previous year. As such, the group has announced a new £750mn share buyback, and has raised its half-year dividend by 60 per cent.
With a forward price/earnings ratio of 22.3, Compass doesn’t come cheap, and there is a risk that the caterer is still enjoying a post-Covid rebound that will wane as time goes on. The group’s operating profit margin has also yet to recover from the blow of the pandemic (it sat at a comfortable 7.4 per cent in 2019).
However, margins are moving in the right direction – despite high mobilisation costs associated with new clients – and demand for catering services is building. Compass's experienced management team and strong track record are the final garnish. Buy.
Last IC View: Buy, 1,900p, 12 Jan 2023
| COMPASS (CPG) | ||||
| ORD PRICE: | 2,105p | MARKET VALUE: | £36.6bn | |
| TOUCH: | 2,104-2,106p | 12-MONTH HIGH: | 2,144p | LOW: 1,631p |
| DIVIDEND YIELD: | 1.8% | PE RATIO: | 29 | |
| NET ASSET VALUE: | 312p* | NET DEBT: | 57% | |
| Half-year to 31 Mar | Turnover (£bn) | Pre-tax profit (£mn) | Earnings per share (p) | Dividend per share (p) |
| 2022 | 11.5 | 632 | 26.7 | 9.40 |
| 2023 | 15.7 | 831 | 36.4 | 15.0 |
| % change | +37 | +31 | +36 | +60 |
| Ex-div: | 08 Jun | |||
| Payment: | 27 Jul | |||
| *Includes intangible assets of £6.9bn, or 397p a share | ||||
