Compass Group plc (CPG) Ordinary 11.05p

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Compass Group’s underlying revenue grew by 10.6% to $42.2bn over the 2024 financial year, driven by new business wins as well as a 2% increase in volume and a 4% increase in price.

Underlying operating profit was up by 16.4%, helped by efficiency gains and pricing initiatives.

Underlying free cash flow was up 14.8% to $1.7bn. Net debt increased $932mn to $5.4bn, reflecting increased investment in acquisitions.

Guidance for this year was a little softer than analyst forecasts suggested. Compass expects organic revenue growth of over 7.5% and a high-single-digit uplift in underlying operating profit.

A proposed final dividend of 39.1 cents brings the total for the year to 59.8 cents, an increase of 13.7%.

The shares were down 2.0% in early trading.

Our view

Last year contract caterer Compass Group managed to push up prices and still increase the amount of business it did with both new and existing customers.

Compass feeds hungry mouths everywhere from stadiums to university halls and offices. It's a natural beneficiary of companies looking to outsource their food offerings (a classic move when economic conditions get tough).

Guidance for the current year is on the cautious side. However, revenue and profits are still expected to outpace the economy. That’s before the impact of some chunky acquisitions made last year. And while there can be no guarantees, we think there could be some upside to these numbers.

Compass estimates only around half of its target market currently outsources their food preparation, and the group commands less than 15% of the $320bn food services business. That suggests there's a big slice of pie still up for grabs. And with about half of total revenue coming from non-cyclical sectors, Compass has another layer of shelter against challenging economic conditions.

As one of the leading players in this fragmented market, Compass is growing both organically and through acquisitions. This can help it to add new capabilities or get a leg up in markets where its under-represented, but there’s always some execution risk when buying new companies.

Compass' scale means that it can provide customers with a level of certainty around their catering costs whilst maintaining high standards of quality and safety. As such, the inflationary environment of recent years has contributed to new business wins, which continued to hold up well over 2024.

Compass has also proved a dab hand at navigating the impact of inflation on its own operations with profitability still trending higher. As well as price increases, menu management and a focus on where it buys its ingredients and equipment are some of the tools it has at its disposal. Slowing growth in input prices could provide a further boost to the bottom line, but there remain some inflationary risks on the horizon.

Net debt has been on the up, but this is in part reflective of significant acquisition activity, which we think could drive further value for shareholders. Borrowing remains in the company’s target range, so we’re not overly concerned.

Strong cash flows are forecast to cover the dividend and have paved the way for a nearly completed share buyback. Though, no returns are guaranteed.

Overall, we think Compass is an attractive business, with external conditions creating something of a perfect storm to boost demand for outsourcing. That's earnt it a valuation at the top of its peer group, which does mean investors are likely to be disappointed if there’s any further slowdown in growth

Environmental, Social & Governance Risks

Consumer services companies are medium-risk in terms of ESG, and very few companies are excelling at managing them. That leaves plenty of opportunity for forward-thinking firms. The primary risk-driver is product governance. The impact of their products on society, labour relations and environmental concerns are also key risks to monitor.

Compass Group's overall management of material ESG issues is strong according to Sustainalytics. However, ESG reporting is not in accordance with leading reporting standards. The Group is a significant employer with strong health and safety policies in place but Sustainalytics has identified minor controversies and called out talent recruitment as an area for improvement. There's also a broad set of sustainable food supply policies in place with measurable and ambitious targets in pace.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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