Morning Note: Market news and an update from Compass Group.

Market News

US equity markets enjoyed a rebound last night – S&P 500 (+1.1%), Nasdaq (+1.6%) – spurred on by tech stocks as investors look forward to a busy week of corporate earnings. Tesla, Alphabet, and Visa report this evening.

This morning in Asia, markets were subdued: Nikkei 225 (flat); Hang Seng (-0.9%); Shanghai Composite (-1.5%). The yen strengthened against the dollar. The FTSE 100 is currently trading 0.3% lower at 8,169.

Sterling buys $1.2924 and €1.1868. The pound’s world-beating rally has turned Amundi from bear to bull, shifting to an overweight position with expectations of more gains. Global FX head Andreas Koenig is targeting a level as high as $1.35 against the dollar by the end of the year.

Gold held steady at $2,395 an ounce. The oil price continued its recent slide, with Brent Crude currently trading at $82.50 a barrel. Copper continued its recent slump – currently $4.13 a pound – with soaring stockpiles, a relatively weak manufacturing outlook, and unsatisfactory Chinese growth among negative drivers.

Source: Bloomberg

Company News

Compass Group has this morning released a short trading update for the three months to 30 June, the third quarter of its financial year to 30 September 2024. The company delivered another strong quarter and has nudged up its full-year guidance. In response, ahead of the analysts’ call, the shares are up 3% in early trading. 

Compass is the world’s largest foodservice company, operating in around 30 countries, serving over 5.5bn meals a year. The group also operates a targeted support services operation that accounts for 15% of revenue. From this financial year, the company is reporting in US dollars.

During the latest quarter, organic revenue – a combination of like-for-like volume growth, price, new business, and client retention – grew by 10.3%, slightly ahead of the market expectation of +9.5%. This leaves the rate of growth in the first nine months of the group’s financial year at 10.9%.

The “flight to trust” continued and the group benefitted from strong outsourcing trends, with net new business growth accelerating in the quarter. First-time outsourcing trends continued, with an exciting pipeline of new business opportunities. Client retention remained strong. As expected, Compass saw a moderation of pricing growth which is now running in line with inflation. Volumes continued to benefit from the quality of the group’s offer and the value gap compared to the high street.

The company generated good growth across all regions. The largest division, North America (c. two thirds of revenue), grew by 9.9% in organic terms. In Europe, the group has continued to enjoy a step change in its performance – organic revenue was up 12.0% – which has benefited from growth initiatives as well as favourable outsourcing conditions. The Rest of World region grew by 8.5%.

The group has continued to reshape its portfolio to focus on growth opportunities in attractive markets. Investment is being made as the group seeks to replicate its North America blueprint elsewhere, to support existing capabilities, and increase operational flexibility.

As expected, there is no update on profitability or the group’s financial position at this stage. As a reminder, margins continue to recover back to pre-covid levels and free cash generation remains strong. At the last balance sheet date (31 March 2024), financial leverage was 1.4x net debt to EBITDA, within the medium-term target of 1.0x-1.5x.

In response, the group is buying back its shares and, as at 19 July, it had completed $300m of the $500m programme announced in November 2023, with the remainder to be completed before the end of the calendar year. The group also pays an attractive dividend – in May, a half-year payout of 20.7c (16.5p) was declared, up 15.6% versus last year.

As the group focuses on the significant structural growth opportunities in its core markets, it has stepped up its M&A activity to expand its portfolio of brands, focusing on digital innovation and delivered-in solutions. In the financial year to date, net expenditure on M&A, including CH&CO and the disposal of the Brazilian business, was $836m.

Although larger deals like CH&CO, a provider of premium contract and hospitality services in the UK and Ireland, may reduce the amount of excess cash flow available for share buybacks, we believe reinvesting in the core business is good capital allocation and will generate upward pressure on earnings forecasts over time.

Overall, Compass continues to show it has the flexibility to weather the uncertain macro-economic environment whilst continuing to invest in the business to enhance its competitive advantage, support long-term growth prospects, and further consolidate its position as the industry leader in food services. Investment in digital expertise is bringing benefits of increased new business wins, higher customer participation and transaction spend, reduced food waste and food cost, and increased productivity and staff retention. Although there are threats – permanently increased levels of working from home and online learning, higher unemployment in a downturn, and increased competition from delivery providers – we believe the company is well placed to cope, with the more cyclical Business & Industry unit now a smaller percentage of revenue (a third vs. a half) and a higher level of volume protection in contracts.

The scope for growth from first-time outsourcing and share gains is significant, and the group currently has an excellent pipeline of new business. As the largest player (albeit with less than a 15% share) in the $300bn global market, Compass is well placed to consolidate its position as a trusted provider, able to offer clients and consumers safe and innovative solutions. Scale provides a vital advantage over smaller players, while corporates and other institutions will be more open to outsourcing as they seek improved health and safety protocols, resilient food supply chains, and financially strong suppliers. This is especially the case in the health and education sectors which previously used in-house catering providers.

The company has today raised its guidance for the financial year to September 2024: underlying operating profit growth is now expected to be ‘above 15%’ on a constant currency basis, compared to ‘towards 15%’ previously. This will be driven by organic revenue growth ‘above 10%’ (versus ‘towards 10%’ previously) and ongoing margin progression. Net new business growth is expected to grow by 4%-5%, with H2 outpacing H1.

Overall, the company remains ‘excited’ about the significant structural market opportunity globally. It expects to sustain mid-to-high single-digit organic revenue growth (i.e., 5%-8%) and return to its historical pre-Covid margin (7.5%). This will drive profit growth above revenue growth, allowing shareholders to be rewarded with further returns.

Source: Bloomberg