- Operating profit outlook raised again
- ‘Good growth’ across all regions in Q3
- New business wins accelerating
Shares in Compass Group (CPG) climbed 4.6% to £22.92 in early dealings after the catering giant upped its full year sales and profit guidance for the second time this year.
The upgrade followed a forecast-beating third-quarter performance from the Chertsey-based food service star turn, which has emerged from the pandemic in a stronger position with enhanced growth opportunities and more loyal clients.
The world’s largest catering group ahead of France’s Sodexo (SW:EPA), Compass now expects organic revenue and operating profit for the year to September 2024 will be ‘above’ 10% and 15% respectively, having previously guided for organic sales growth and operating profit ‘towards’ 10% and 15%.
The FTSE 100 group delivered a 10.3% rise in organic sales for the third quarter ended 30 June, comfortably ahead of the 9.1% the market was looking for, as the rate of new business wins accelerated.
TASTY GROWTH RUNWAY
Compass generated organic growth of 12% in Europe in the third quarter, with North America and the Rest of World delivering 9.9% and 8.5% growth respectively.
‘All regions continue to perform well, and industry trends remain strong, providing Compass with an exciting pipeline of new business opportunities,’ said the company, which continues to benefit from the trend towards first-time outsourcing, where companies close their own in-house catering services and bring in outside providers like Compass.
Bulls believe Compass has a significant runway for growth in an addressable global food services market worth at least $300 billion, of which Compass has less than 15% market share.
The increasing complexities facing many businesses across supply chains, regulations and ESG (environmental, social and governance) factors are accelerating outsourcing wins for major players such as Compass, which as at 19 July had completed roughly $300 million of the $500 million share buyback announced in November 2023.
STRONGER FOR LONGER
With a ‘buy’ rating on the stock, Shore Capital believes Compass ‘can grow stronger for longer versus historic trends’. The broker’s DCF- (discounted cash flow) derived fair value suggests a share price of around £26 for the stock, ‘although this could prove conservative given scope for continued upgrades and building excess capital on the balance sheet’.
Quilter Cheviot analyst Mamta Valechha commented: ‘While the statement didn’t break it down, it did mention that net new business wins positively contributed to growth and accelerated into the quarter. Volume growth positively contributed too given the group’s value and quality proposition it offers versus the high street. Pricing while positive, did moderate however, in line with inflation, but it is pleasing to see Compass offset this with strong business growth.’
Valechha added: ‘The trends that have driven this positivity remain strong for Compass. The outsourcing market remains very attractive, driven by complexities such as increased regulation, sustainability, changing dietary expectations and inflation, all of which are here to stay and something companies want and need to address. Management has arranged the business well for this and as such Compass looks in prime position for the rest of the year.’
