Shares in global food service group Compass (CPG) topped the FTSE leader board, gaining 8.5% to £17.95, after the firm posted an upbeat first quarter trading update which showed revenues almost back to pre-pandemic levels.
The company also backed its full-year outlook of 20%-plus revenue growth and a year-end operating margin of 7% although it advised progress would be second half-weighted.
STRONG START
The current financial year, which began in October, started with an acceleration in organic turnover growth from 32.9% in the final quarter of last year to 38.6% in the first quarter.
The improvement was largely driven by new business, continued strong client retention and ‘some ongoing recovery in the base business’, with little evidence the Omicron variant had impacted the business.
Overall revenues were back to 97% of pre-Covid levels with four out of five sectors - Education, Healthcare, Sports & Leisure and Defence, Offshore & Remote - trading above 2019 levels and only one, Business & Industry, trading below.
By region, the US is just about back above pre-Covid levels while the European and the Rest of the World divisions are both around 10% below, although Europe showed a marked improvement from the previous quarter.
POSITIVE OUTLOOK
While the underlying business continues to recover, the acceleration in growth was mainly driven by new wins and re-bids. Encouragingly, this momentum has carried over into the current quarter with three of the five top global contract wins coming from first-time outsourcing deals.
The recovery in organic growth is set to moderate during the year from 30%-plus to between 20% and 25% but the firm believes there is potential for revenues and earnings to grow ‘above historical rates, rewarding shareholders with further returns’.
In addition, it has a ‘strong pipeline of exciting opportunities across all regions and sectors’ in terms of bolt-on acquisitions, after spending £87 million on new businesses in the US last quarter.
EXPERT VIEW
Shore Capital analyst Greg Johnson reiterated his call to buy the shares after the update. ‘Firstly, the trading backdrop continues to recover, and we have increasing confidence over the ability to return margins to historic levels. The key however is the potential for a sustained acceleration in net new business growth, more than compensating for any structural shortfall from WFH (working from home).’
In his ‘blue sky scenario,’ Johnson sees Compass revenues growing to £35 billion per year, which based on historic profit and valuation measures would justify a share price of around £28 per share, a premium of more than 50% to today’s level.
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