Compass Group plc (CPG) Ordinary 11.05p

No recommendation - No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Compass Group’s third quarter revenue has risen 10.3% on an organic basis, with all regions in positive territory. The trading update noted that pricing had moderated but volumes ‘continued to benefit’.

The Group’s net spend on mergers & acquisitions is $836mn so far this year. Around $200mn of the $500mn share buyback programme remains, and is expected to complete by the end of December.

Full-year guidance has been upgraded. Underlying revenue growth is now expected to be above rather than towards 10%, with underlying operating profit guidance also rising to above 15%.

The shares were up 3.9% following the announcement.

Our view

Catering supplier Compass has pleased the market after serving up its second upgrade to guidance this year.

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).

Growth isn’t reaching the same heights as last year. But given this reflects more normalised comparisons following a period of post-covid re-openings, we don't think double-digit revenue growth is a bad outlook.

Compass estimates only around half of its target market currently outsources their food preparation, and the group commands less than 15% of the £300bn 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.

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 has contributed to new business wins. The downside of inflation of course is the impact on margins.

Compass has been pulling all the levers it can to mitigate inflation. 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. That's seen margin improvements so far in 2024. There are some rays of hope that cost pressures are receding, which could provide a further boost to the bottom line.

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 pave the way to complete the current share buyback program. Given the improvement in profitability, we're comfortable with this level of cash returns to shareholders. As ever there are no guarantees.

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 towards the top of its peer group. The performance so far this year has impressed, and the pick up in new business creates a strong foundation for future periods. But there remains pressure to deliver. Compass wouldn't be totally immune to an economic downturn.

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.

Previous Compass Group plc updates