25th Jul 2023 17:04
(Alliance News) - Compass Group PLC's share price suffered on Tuesday as analysts suggested the absence of upgrades to earnings forecasts after its third quarter trading update could be viewed as a disappointment.
"Overall a fine update though investors may have been looking for slightly more from this release so could see shares off a touch today," was the view at Barclays.
The Chertsey, Surrey-based firm said organic revenue growth was 15% in the three months to June 30, which included 14% growth in North America, 17% in Europe and 20% for the rest of the world. Meanwhile, group organic revenue growth for the year-to-date was 21%.
The firm reiterated its annual guidance, expecting operating profit growth of 30% on a constant-currency basis, which is to be delivered through organic revenue growth of around 18% and an underlying operating margin in the range of 6.7% to 6.8%.
These expectations were set in May, when Compass upped its full-year guidance alongside half-year results. It had previously forecast operating profit growth of above 20% and organic revenue growth of 15%.
Greg Johnson at Shore Capital said: "A lack of upgrade to this guidance may disappoint, although the Q3 organic growth rate of 15% suggests guidance remains conservatively set."
Shares fell 5.2% to 2,016 pence in London on Tuesday but remain 5.7% higher in the last 12 months.
Johnson said the update was "comfortably above forecast, with near term guidance and bullish outsourcing trends reiterated."
Organic revenue growth in the three months, the financial third quarter, increased by 15%, which compares with his second half assumption of 10-12%. Organic revenue growth continues to be driven by exceptionally strong net new business, he pointed out.
He continues to see the potential to double earnings over the next five years.
Barclays continues to view Compass as a "high quality compounder" though it expects the share performance for the remainder of this year to be more skewed to the fourth quarter than over coming months. It reiterated an 'overweight' rating.
Looking forward, Shore Capital's Johnson sees a combination of mid-to-high single digit annual organic revenue growth, continued margin recovery and an ongoing capital return programme, delivering robust earnings growth.
He forecasts earnings per share of 98 pence in the 2024 financial year, rising towards 110p by the following year. Johnson has a 'buy' rating on Compass.
Derren Nathan at Hargreaves Lansdown felt the company was continuing to deliver.
"Its sheer scale enables it to achieve value and efficiency in contract catering, enabling it to win new business and put up prices," he said.
He accepted an earnings multiple of over 20x might seem a "little punchy for what, on the face of it, some might consider a boring business."
"But 30% profit growth would seem anything but boring, particularly given current economic pressures", he stressed.
"That does add some pressure to hit its numbers but, so far, Compass hasn’t dropped the ball and its not resting on its laurels either," he added.
By Jeremy Cutler, Alliance News reporter
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