- First-half sales and margins beat expectations
- Organic sales and profit growth forecasts increased
- Additional £750 million buy-back announced
Usually, for firms with tens of billions of pounds in annual revenues, the ‘law of big numbers’ means they can struggle to grow meaningfully.
Happily for shareholders that’s not the case at catering giant Compass (CPG), which reported stronger-than-expected underlying sales growth in the first half allowing it to raise both its full year outlook and its share buyback programme.
NEW CLIENTS FUEL GROWTH
For the six months to the end of March, the group served up underlying revenue of £15.8 billion, an increase of 24.7% on the same period a year ago, with ‘balanced growth across all regions’ and a ‘very strong’ performance in Europe.
The trend towards first-time outsourcing – where companies close their own in-house catering services and bring in outside providers like Compass – looks to be accelerating with 45% of new business coming from first-time customers.
‘Net new business continued to be excellent, and significantly higher than our historical rate. We are particularly pleased with the step change in our Europe performance which has benefited from growth initiatives as well as favourable outsourcing conditions’, commented chief executive Dominic Blakemore.
Underlying operating profit increased by a staggering 41% to top the £1 billion mark for the first time, meaning earnings per share grew by around 43% to 42.7p against 29.9p previously.
Free cash flow rose by 64% to £590 million from £360 million, allowing the firm to increase the interim dividend by 60% to 15p per share and announce a further buyback of £750 million worth of shares, equivalent to around 2% of its market cap.
RAISING THE BAR
On the back of its stronger-than-anticipated first-half performance, the group raised its full-year organic revenue growth target from 15% to 18% and forecast operating profit growth ‘towards 30%’ against a previous target of ‘above 20%’.
‘Longer term, we expect the growth opportunities in the market to sustain mid-to-high single-digit organic growth and a path back to our historical margin, leading to profit growth above revenue growth. With our established value creation model intact, we will continue rewarding shareholders with compounding returns over the long term’, said Blakemore.
Shore Capital analyst Greg Johnson reiterated his Buy recommendation on the shares after first-half operating profit beat his forecast by £100 million and said he expects ‘material cash returns’ to shareholders over the medium term, reflecting Compass’s ‘attractive structural growth, high return on investment model and a 1-1.5x net debt/EBITDA capital framework’.
Compass shares gained almost 80p or 3.8% to £21.44 at the market open before settling back to trade 1.7% higher at £20.99 by mid-morning.
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