Why Compass Group Is Outperforming The Market (CPG)?

  • Mar 04, 2019 GMT
  • Team Kalkine
Why Compass Group Is Outperforming The Market (CPG)?

Company Overview

The Compass Group PLC (Ticker symbol: CPG) is a British Multinational corporation based in Chertsey, Surrey, and is the largest contract foodservice company in the world. The group was founded in the UK as 'Factory Canteens Ltd', and in 1987, after changing hands several times, management buy-out of the contract services division of Compass Services from Grand Metropolitan led to the formation of the company. In 1988 the group was listed in London Stock Exchange and in 1998 became a constituent of FTSE 100 index. It provides food and support services to a wide range of clientele, from armed forces to schoolchildren, in more than 50 countries and provides 5.5 billion meals for office workers. Paul Walsh has been the chairmen of the group since February 2014. He is supported by Dominic Blakemore who took over the job of Group Chief Executive in January 2018.

Segments

The company operates its brands through five separate sectors where each segment has a distinct set of client needs. The business is separated in Business & Industry, Healthcare & Seniors, Education, Sports & Leisure and Defence, Offshore & Remote. The company generates most of its revenue from Business & Industry, which amounts to 39% of the total revenue, followed by Healthcare & Seniors, which brings 24% of the revenue. The operations constitute services to customers in offices, schools, universities, and hospital. It offers breakfast, lunches and dinners, along with hospitality services. The geographical market is distributed in three geographies: North America, which is the largest market at 59% of total sales, Europe and Rest of the World.

Key Financial Metrics (FY 2018, in £billion)

(Source: Company Filings)

Financial Highlights – FY 2018

  • In 2018, the underlying revenue increased by 5.5 per cent to £23.24 billion, in comparison to £21.84 billion in 2017.
  • The operating profit grew as well to £1.74 billion, representing a rise of 7.1 per cent over the last year.
  • In the financial year 2018, earnings per share surged by 12.5 per cent to 77.6 pence as compared to the last year data, while the free cash flow rose to £1.14 billion, from £0.97 billion in 2017.
  • The company reported strong growth in organic revenue of 6.9 per cent in the three months of December 2018 vs last year, beating expectations with the help of sporting and music event contracts, to reach all-time highs.
  • Earnings were assisted by favourable currency movements, with a favourable currency translation impacting revenues by £107 million and profits by £10 million. Moreover, if the exchange rates remain unchanged for the rest of the year, revenue is expected to be positively influenced by £508 million and operating profit by £43 million.
  • Revenue in North America rose by 8 per cent compared to the last three months of 2017, reflecting significant growth across all sectors, especially in Business & Industry and Sports & Leisure.
  • In Europe, organic sales rose by 6.4 per cent vs last three months of 2017, primarily due to the considerable impact of UK Defence contracts realised, and a beneficial Sports & Leisure calendar.
  • For the financial year 2019, the company has provided guidance for growth in revenue of 4 per cent to 6 per cent. The company looks set to achieve the target, and, is expected to lie above the middle of its target, with modest growth in margin.

Ratios

(Source: Thomson Reuters)

Ratios Commentary

  • The profitability margins of the company have remained stable over the years. The operating and net margin are below the industry median, exhibiting higher operating expense.
  • The liquidity position of the company is stronger than its peers.
  • The company is highly leveraged in comparison to its competitors.

Share Price Commentary

  • On 1st March 2019, Compass shares closed at GBp 1,687.50, up by 1.35 per cent against its previous day closing price.
  • Stock's 52 weeks High and Low is GBp 1,776.50/GBp 1,427.50. At the closing price, the share was trading 5.01 per cent lower than its 52w High and 18.21 per cent higher than its 52w low.
  • Stock’s average traded volume for 5 days was 2,377,582.40; 30 days - 2,617,109.43 and 90 days - 3,111,156.89. The average traded volume for 5 days was down by 9.15 per cent as compared to 30 days average traded volume.
  • On the valuation front, the stock was trading at a trailing twelve months PE multiple of 21.1x as compared to the industry median of 13.8x.
  • One-year price return of the stock stood at 9.68%, and on a year-to-date basis, shares were up by 2.27% respectively.
  • The company’s stock beta was 0.87, reflecting relatively less volatility as compared to the benchmark index.
  • Total outstanding market capitalisation was around £26.77 billion and a dividend yield of 2.23 per cent.

Challenges

The group acknowledged the challenges it faces from political and economic uncertainties in the macro environment. The group CEO Dominic Blakemore noted the company remains “a touch cautious and conservative in the outlook”, taking into consideration factors like Brexit, the effects of US government shutdown and street protests in France. The group envisages adverse effects of Brexit, including higher inflation, a slowdown in client decision-making and fall in hiring. The weekend consumer sentiment has been resulting in negative volumes in the UK, and this has continued in the first quarter as well. Brexit calls into questions the company’s food supply chain and the effect on the labour force, which might put downward pressure on margins. Moreover, increased calls for a rise in minimum wages can further strain profitability which can be further deteriorated due to inflation across markets.

Growth Prospects

The food service market offers a vast opportunity for expansion and growth. With the market estimated to be more than £200 billion, and with only about 50% of the market currently outsourced, the growth opportunities for the company are immense, accelerated by significant growth in the North America and decent progress in Europe and Rest of World. The group also has been cutting food, labour, and overhead costs in recent times and has kept its prices flexible to maintain the margins.

Conclusion

The company is in a great position to capture the ever-expanding food servicing market. The company’s growth prospects look favourable as the company has focused on cutting down on costs. The current trading levels indicate the stock movement in the bullish zone with support coming from few growth drivers like growth in North America and higher than expected overall revenue.

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