Morning Note: Market news and updates from Compass and Ashtead.

Market News

The dollar dipped against its major peers on mounting speculation the Federal Reserve is nearing the end of its tightening cycle. This pushed the yen toward a three-week high. Pimco is buying the Japanese currency, betting the Bank of Japan will be pressured into tightening policy.

This morning in Asia, equity markets were mixed: Nikkei 225 (-0.6%, retreating after touching a 33-year high); Hang Seng (+1.6%); Shanghai Composite (+0.5%). The S&P futures are currently predicting little change at the open this afternoon. The FTSE 100 is currently trading 0.3% lower at 7,475.

Bond traders will scrutinise the level of demand at today’s 20-year Treasuries auction to gauge if November’s rally will last. Worries about a reversal were evident during the 30-year auction earlier this month, when the market briefly tumbled after the Treasury had to offer an unusually large yield premium to sell the securities. Today’s sale “will be a good sanity check,” said William Marshall at BNP Paribas.

Jeremy Hunt is set to reveal plans to cut the UK’s tax burden on Wednesday, a pivotal moment for the struggling Tories ahead of an election expected next year. He said yesterday he plans to cut business taxes and reform welfare in a bid to lift the economy. Hunt has also considered a cut to inheritance taxes, but that has drawn criticism from some Tory MPs. He pushed back against reports he may cut income tax and the national insurance levy, saying that might fuel inflation. Sterling trades at $1.2486 and €1.1427.

The oil price rose above $81 a barrel after rallying more than 4% on Friday following a plunge of a similar magnitude the day before. Gold trades at $1,978 an ounce.

Source: Bloomberg

Company News

Compass Group has this morning released results for the financial year to 30 September 2023 which were in line with market expectations and confirmed another strong year for the business. The company set out positive new guidance for the current financial year and announced a further share buyback programme, albeit the level ($500m) was lower than expected. In response, the shares have seen some profit taking this morning and are down 5% in early trading. 

Compass is the world’s largest foodservice company, operating in around 35 countries, serving over 5.5bn meals a year. The group also operates a targeted support services operation that accounts for 15% of revenue.

During the year, revenue grew by 21.6% to £31.3bn. Organic revenue – a combination of like-for-like volume growth, price, new business, and client retention – grew by 18.8%. This compared to company guidance of 18%. The “flight to trust” continued and the group benefitted from strong outsourcing trends, with net new business growth of 4.6%, significantly above the historical rate of around 3%. Overall, the group signed a record of £2.7bn of new contracts. First-time outsourcing trends continued, accounting for 50% of new business wins, and client retention remained strong at 96.5%. Compass saw like-for-like volume growth of 7% and pushed through 7% pricing growth.

The group’s largest region, North America (c. two thirds of revenue), grew by 17.4% in organic terms, while the margin rose by 60bps to 7.8%. In Europe, the group has continued to enjoy a step change in its performance – organic revenue was up 21.6% – which has benefited from growth initiatives as well as favourable outsourcing conditions. The Europe margin was up 60bps to 5.6%. The Rest of World region grew by 21.8% and saw its margin rise by 40bps to 5.6%. During the year, the group has exited nine tail countries as it continued to reshape its portfolio to focus on growth opportunities in attractive markets.

The group’s margin grew by 60 basis points to 6.8%, at the top end of the company guidance of 6.7%-6.8%. The strong improvement reflects the benefits of operating leverage, operational efficiencies, and appropriate pricing to manage inflation headwinds, and is despite mobilisation costs associated with new business growth. Operating profit grew by 29.6% to £2,122m, versus guidance for growth of 30%. Return on capital employed rose from 15.8% to 19.5%.

Cash conversion was 86% and the business continued to generate strong free cash flow, up 39% to £1,241m in the year. The group spent £1.2bn on capex (2.9% of revenue) and £304m on bolt-on acquisitions as it continued to expand its portfolio of brands, focused on digital innovation, and delivered-in solutions.

Financial leverage reduced to 1.2x net debt to EBITDA, at the lower end of the medium-term target of 1.0x-1.5x. In response, the group is buying back its shares – it recently finished the final tranche of its £750m programme. Today, the group has announced a further share buyback of $500m (£410m) to complete in 2024 subject to M&A activity. The group is also paying an attractive dividend – a full-year payout of 43.1p was announced, up 36.8% versus last year.

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 (less than 15% share) in the £250bn 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 provided new guidance for the financial year to September 2024: underlying operating profit growth towards 13% on a constant currency basis delivered through high single-digit organic revenue growth and ongoing margin progression. Given the growth opportunities, the group expects capital expenditure to be around 3.5% of underlying revenue in 2024, with net M&A expenditure likely to be higher than in 2023.

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

Ashtead Group has this morning released an unscheduled trading update in which it has revised down its full-year revenue guidance and earnings expectations. In response, the shares have been marked down by 12% in early trading.

Ashtead is a leading supplier of rental tools and equipment to the non-residential construction industry in the US & Canada (91% of revenue) and the UK (9%). The company represents a good play on the prospect on infrastructure spend by Western governments seeking to stimulate economic growth via fiscal means and the shift in the market from owning to renting equipment. In the US, for example, growth is being enhanced by the increasing number of mega projects and recent legislation. The rental fleet on 31 July 2023 at cost was $17bn and the average fleet age was 33 months.

Significant investment is enabling Ashtead to take advantage of the substantial structural growth opportunities. The strategy is to generate growth through strong same-store growth supplemented by greenfield openings and bolt-on acquisitions. As a result, the group continues to broaden its product offering and leverage the benefits of scale. Although listed in the UK, Ashtead reports in US dollars.

The company is due to announce first half results for the period ended 31 October 2023 on 5 December. The group expects to report record results, with rental revenue growth of 13%, EBITDA growth of 15% (to $2,580m), and adjusted profit before taxation growth of 5% (to $1,310m), driven by strong execution against its strategic growth plan.

However, despite robust end markets, ongoing structural drivers, and a record operating performance, revenue late in the second quarter (i.e., October) was affected by lower levels of emergency response activity with a significantly quieter hurricane season than seen in recent years and fewer naturally occurring events, such as wildfires, with this effect continuing into November.

In addition, the writers’ and actors’ strikes, which have impacted the group’s Film & TV business in Canada significantly, have persisted for longer than anticipated with some impact on the rest of the Canadian, US, and UK businesses that rent into that space. This has also continued into November.

Although the group still expected to deliver record results for the full year to 30 April 2024, reflecting the factors above, management is revising its full-year revenue guidance and earnings expectations. Group rental revenue growth is now expected to be in the range of 11%-13%, versus 13%-16% previously. This will result in EBITDA being 2%-3% below previous market expectations. Higher depreciation and interest charges will result in PBT being below market expectations.  The guidance for capex of $3.9bn-$4.3bn remains unchanged.

Despite these one-off events impacting the current financial year, the group highlights that its end markets in North America remain robust, supported in the US by an increasing number of mega projects and recent legislative acts. This, combined with the substantial structural growth opportunities seen for the business means the company looks to the future with confidence.  

Source: Bloomberg