11th May 2022 12:36
(Alliance News) - Compass Group PLC was the star of the show in the FTSE 100 on Wednesday, after the contract catering firm upped its annual revenue outlook and announced a bumper GBP500 million share buyback.
Shares in Chertsey, England-headquartered Compass were 7.6% higher in London on Wednesday afternoon at 1,698.00 pence. In 2022 so far, the shares are up only 2.8%, however.
"Compass Group has issued a highly encouraging update for the six months to March 2022. The revenue rebound has been stronger than anticipated and new business wins remain elevated leading to an uplift in full year revenue guidance, whilst despite inflationary headwinds operating margin guidance remains unchanged," Shore Capital analyst Greg Johnson said.
AJ Bell Investment Director Russ Mould added: "Boring can be beautiful it seems. Catering giant Compass, that feeder of office workers, students and occupants of care homes around the world, is back at pre-Covid levels and perhaps more notably feeling sufficiently confident to lift revenue guidance and start buying back shares."
In the six months to March 31, pretax profit jumped to GBP632 million from GBP133 million the year before, as revenue rose 36% to GBP11.5 billion from GBP8.4 billion.
In the half-year that ended March 31, 2020, largely before the Covid-19 lockdowns, Compass achieved pretax profit of GBP771 million on revenue of GBP12.62 billion.
Compass noted its underlying revenue in the second quarter of financial 2022 was double the year prior, and it maintained a run rate above its pre-Covid levels.
"There's nothing innovative about Compass and what it does but in uncertain times, one certainty is that people will still need to be fed, and the company is very much at the top of the food chain in its industry," AJ Bell's Mould continued. "Compass' scale creates significant barriers to entry and helps it to keep tight control on costs despite surging inflation in food prices.
Compass said the first-half revenue surge was driven by a "notable" volume recovery in its Business & Industry and Education businesses.
Matt Britzman, equity analyst at Hargreaves Lansdown, said: "The rising cost of food means more businesses are looking to outsource, and with sporting events back on the table Compass Group's revenue has made a near complete recovery to pre-pandemic levels. It marks an important turning point with the focus now firmly on the future and markets have reacted well.
"Revenue's been boosted by new business, totalling around GBP2.5 billion over the last 12 months, which means there's room for things to settle comfortably ahead of pre-pandemic levels should legacy volumes get closer to a full recovery. Changing behaviours with respect to working from home mean there'll likely be some dilution of previous volumes, but there's still room to squeeze more from the recovery."
The company also works in the Sports & Leisure field, where it caters at stadiums and conference venues, sectors that also have benefited from a re-opening of the economy. It also has Healthcare & Senior Living and Defence, Offshore & Remote arms.
"We continue to recover strongly from the pandemic and have achieved the important milestone of revenue exceeding our pre-Covid level on a run rate basis," Chief Executive Dominic Blakemore explained.
Mould added: "If it has the appetite, it feels like there is still a very large amount of market share for Compass to snaffle up. Despite its leading position in the global food service market, its overall share is only just in the double digits with plenty of smaller regional operators and in-house providers from whom it could take business."
Due to its strong performance in the first half, Compass is upping its organic growth guidance, which is now expected to grow about 30%, lifted from the previous expectation of 20% to 25% growth.
"The current backdrop is encouraging more businesses and organisations which do their catering in-house to turn to Compass, driving new contract awards and helping to make up for any negative impact from the work from home trend. And it feels significant that Compass has just posted the highest ever level of client retention on record," Mould said.
Compass declared a 9.4p per share dividend, having not paid an interim payout a year prior. It is the company's first half-year dividend since the pandemic began, though it had paid a 14p final dividend for financial 2021.
Compass also announced a GBP500 million buyback for calendar 2022.
Shore's Johnson said: "We remain buyers of Compass. Firstly, the trading backdrop continues to recover, and we have increasing confidence over the ability to return margins to historic levels, despite elevated inflation.
"The key however is the potential for a sustained acceleration in net new business growth, more than compensating for any structural shortfall from WFH, with broader inflationary pressures a further succour to first-time outsourcing. Furthermore, net debt is now some GBP2 billion below pre-Covid levels providing added optionality, with the dividend having already been restored. Although better value can arguably be found elsewhere across the broader consumer space, Compass is a quality play for these certain times."
By Paul McGowan; [email protected]
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