Workers returning to the office and resurgent leisure and tourism bolstered the first-half profits and share price of catering giant Compass Group this week.
Revenues at the group increased a whopping 36.2% to £15.7bn in the six months ended 31 March 2023, driven by new business wins and currency tailwinds. Organic growth was still a healthy 25%, as it won new contracts above historical levels of more than 5% – complemented by like-for-like volumes rising about 13% and pricing growing by 7%.
It reported double-digit increases in organic revenue across all sectors in the period. The group cited particularly strong performance in its business & industry division, as employees continued to return to the office, and sports & leisure, where participation rates improved.
Meanwhile, first-time outsourcing trends accounted for about 45% of new business wins in the half as it benefited from cost-conscious companies sub-contracting their catering operations.
As a result of this strong headline growth, operating profits jumped 41% to £1.1bn. Underlying operating margin rose to 6.6% from 5.8%, largely as a result of operating leverage as volumes returned post-pandemic. This was further aided by operational efficiencies and pricing actions to manage inflationary pressures.
Compass consequently lifted its full-year outlook and now expects operating profit growth towards 30% rather than above 20%. This is on the back of organic revenue growth of about 18%, up from 15%.
Shore Capital welcomed the “ahead of expectations” results, reiterating its buy stance at £23 per share. “Valuation-wise, the stock looks up with events, but we continue to see the potential for it to grow ‘faster for longer’,” the broker said.
Third Bridge cautioned that ongoing growth may start to see Compass push deeper into less profitable areas. It commented: “Ongoing inflationary pressures are providing further impetus for organisations that currently self-operate to outsource their foodservice provision. The next outsourcing trend is likely to be in healthcare, seniors, and schools. However, these segments are not particularly profitable, especially schools… It will be crucial to monitor Compass Group’s margin growth as they venture into less profitable sectors.”
Compass shares were up 1.3% to 2,091p on the news and edged up further on Thursday morning.
The shares are up 24% year on year and are trading back at pre-pandemic record highs, illustrating the strength of its recovery since dropping to just over 1,000p in mid-2020.
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