Compass Group – Revenues Well Ahead As Margins Expand

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Compass Group plc (LON:CPG) has reported full year underlying revenue of £25.8bn, up 5.4% over pre-pandemic levels. Growth accelerated in each quarter of the year, with the fourth quarter up 15.9%, with strong growth present across all business segments.

Underlying operating profit was up 87.5%% over last year to £1.6bn, ignoring movements in exchange rates. That’s a margin of 6.2%, up from 4.5% last year despite inflationary pressures and the costs of bringing on new customers. However, margins were below the 7.4% seen in 2019.

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Compass intends to pay a final dividend per share of 22.1p which brings the full year total to 31.5p, an increase of 125%. An initial £500m share buyback has been completed with a further £250m announced today, to be completed in the first half of the financial year.

For 2023, Compass is looking to achieve organic revenue growth of about 15%. It expects underlying operating growth to be north of 20%, ignoring exchange rate movements, with a margin above 6.5%.

The shares were down 4.1% following the announcement.

Compass Group's Earnings

“On all metrics, this was a very strong year for Compass. Growth isn’t just coming from price increases, but also from new customers which the Group said exceeded its own expectations. New business wins totalled £2.5bn, with a strong contribution from both North America and Europe.

Pleasingly, 45% of this was from customers who were outsourcing their contract catering requirements for the first time.  We see this as reflective of long-term structural drivers that Compass Group is benefitting from and it’s a class operator, with customer loyalty reaching record levels.

Margin recovery is proving harder than perhaps the market had hoped for, but it’s still pleasing to see sequential growth coming through in the second half of the year.

Compass needs to take a pragmatic view to this, because if it raises its prices too high then some of the benefits its customers enjoy start to evaporate. We think its doing a good job of walking this tight rope and think it’s well placed to grow market share in its core markets.”

Article by Derren Nathan, Head of Equity Research at Hargreaves Lansdown