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

Market News

The dollar rallied and US equities held firm – S&P 500 (+0.3%); Nasdaq (+0.3%) – after President-elect Trump said the US will impose additional tariffs on China, Mexico, and Canada, ratcheting up concerns about his “America First” policies. Trump said he will place an extra 10% tariffs on Chinese imports, and 25% levies on all products from Mexico and Canada. He said the measures were needed to clamp down on migrants and illegal drugs flowing across the US border. Mexico-exposed stocks, including AB InBev and Heineken, are weak this morning.

Neel Kashkari said it’s still appropriate to consider another rate cut next month. Austan Goolsbee argued for lower rates barring signs of overheating in the economy. The 10-year Treasury currently yields 4.30%, while gold held steady at $2,614 an ounce after a 3% drop in the previous session.

In Asia this morning, equities were broadly lower: Nikkei 225 (-0.9%); Shanghai Composite (-0.1%). The FTSE 100 is currently trading 0.4% lower at 8,260. The UK November BRC shop price index fell by 0.8%. Sterling trades at $1.2575 and €1.1965.

Israel’s security cabinet is expected to vote on a cease-fire deal with Hezbollah on Tuesday, and passage is considered likely, according to an Israeli official. That could pave the way for the US and France, which have mediated the talks, to announce it immediately. Brent Crude trades at $73 a barrel. OPEC+ has little scope to reverse its oil output cuts due to increased rival supply from the US shale industry, Iran’s representative said.

Source: Bloomberg

Company News

Compass Group has this morning released results for the financial year to 30 September 2024. The company delivered another year of strong cash flow which generated attractive shareholder returns. Guidance for FY2025 has been set out, with high single-digit underlying operating profit growth expected to be driven by ‘significant’ first-time outsourcing opportunities. The shares have been strong performers over the long term but have seen a bit of profit taking in early trading this morning. This is probably driven by mild disappointment at the lack of a new buyback programme, although we believe the current M&A programme will generate better long-term shareholder returns.

Compass is the world’s largest foodservice company, operating in 30 countries, serving over 5.5bn meals a year. The group also operates a targeted support services operation, which accounts for 15% of revenue, and a third party food purchasing business. The company reports in US dollars, but its shares are listed in the UK.

During the latest financial year, the group continued to capitalise on dynamic market trends, using its proven competitive advantages to drive higher revenue and profit growth.

Revenue grew by 10.4% to $42.2bn. Organic revenue – a combination of like-for-like volume growth, price, new business, and client retention – grew by 10.6%, versus the company’s full-year guidance of high single-digit growth (i.e., 5%-8%). This was despite continued inflationary pressures and some macroeconomic uncertainty.

The “flight to trust” continued and the group benefitted from strong outsourcing trends, with net new business growth of 4.2%, versus guidance of 4%-5%, with H2 outpacing H1. Growth remains above the historical level of 3%. First-time outsourcing trends continued, with a strong pipeline of new business opportunities. Client retention is strong and moved back to 96%. Compass saw like-for-like volume growth of 2% as the group continued to benefit from the quality of its offer and the value gap compared to the high street. Pricing growth moderated to 4%, more in line with inflation.

The company generated good growth across all regions. The largest division, North America (c. two thirds of revenue), grew by 10.9% in organic terms, while the margin rose by 40 bps to 8.2%. In Europe, the group has continued to enjoy a step change in its performance – organic revenue was up 11.9% – which has benefited from growth initiatives as well as favourable outsourcing conditions. The Europe margin was up 30 bps to 5.9%. The Rest of World region grew by 8.5% and saw its margin rise by 40 bps to 6.0%.

Compass has continued to reshape its portfolio to focus on growth opportunities in attractive markets – the group has exited, or agreed to exit, nine non-core markets, including Brazil and Mainland China. Investment is being made as the group seeks to replicate its North America blueprint elsewhere, to support existing capabilities, and increase operational flexibility.

The group’s margin grew by 30 basis points to 7.1%, driven by the group’s operational scale, efficiencies, and appropriate levels of pricing to mitigate inflation. Operating profit grew by 16.4% to $2,998m, versus the guidance to be ‘above 15%’ on a constant currency basis.

The business continued to generate strong free cash flow, up 14.8% of $1,740m in the year. The group spent $2.6bn on capex, 3.7% of revenue, and slightly higher than guidance of 3.5% due to catch-up from the prior year.

Financial leverage was 1.3x net debt to EBITDA, within the medium-term target of 1.0x-1.5x. The group is buying back its shares and has completed $476m of its $500m (£410m) programme, which is expected to be completed in December 2024. The group is also paying an attractive dividend – a FY2024 payout of 59.8c was declared today, up 13.7% versus last year, equating to a yield of 1.8%. In total, $1.5bn was returned to shareholders. For now, the company hasn’t committed to a further buyback programme.

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, net expenditure on M&A was just over $1bn.

The group is currently prioritising strategic acquisitions to further enhance its unique sectorised approach to clients. Management has a strong track record of successful M&A in North America and is using that blueprint to unlock growth in other regions. Although larger deals 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 strong cash flow 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 $320bn 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 published guidance for the financial year to September 2025 – the group expects to generate high single-digit underlying operating profit growth on a constant-currency basis, including announced acquisitions, disposals and exits in 2024 and to date in FY2025. This will be driven by organic revenue growth above 7.5% and ongoing margin progression. Although this is slightly below some forecasts, Compass has a track record of outpacing initially prudent guidance.

Overall, the company remains ‘excited’ about the significant structural market opportunity globally. Management remains confident in sustaining mid-to-high single-digit organic revenue growth, ongoing margin progression and profit growth ahead of revenue growth.

Source: Bloomberg