Compass Q3 revenue up 5.7%, backs full-year expectations

Catering company Compass Group reported a jump in third-quarter revenue on Thursday as it said it continues to trade "well" and backed its full-year expectations.

In an update on its performance since the end of March, Compass said organic revenue was up 5.7%, or 5.1% excluding the impact of Easter, driven by strong net new business in North America, an acceleration in Europe and good progress in Rest of World.

Meanwhile, for the nine months to 30 June, organic revenue was 5.1% higher.

Compass said that while the margin for the nine months to June was slightly lower than the same period last year, it remains on track to deliver "modest" margin progression for the full year.

In North America, organic revenue grew 7% in the third quarter, or 6.6% excluding Easter, and 7.2% in the nine months to end of June as good growth in the business & industry, vending and healthcare businesses was partly offset by the impact of the timing of sports and leisure events.

Organic revenue in Europe was up 3.2%, or 2% excluding Easter in the third quarter, and 1.4% in the nine-month period, driven by strong rates of net new business in the UK. Compass said benefits from the cost actions taken to offset above average inflation in the UK are starting to come through with an improving run rate. However, these were offset by a more challenging volume and cost environment, meaning nine-month margins were down around 70 basis points.

In Rest of World, third-quarter organic revenue grew 3.1%, or 2.7% excluding Easter, while revenue in the nine-month period was up 3.3%, with the group's increased operational focus on productivity and pricing driving better than expected efficiencies. As a result, margins for the nine-month period were around 60 basis points higher.

Compass also said that if current spot rates continue for the rest of the year, foreign exchange translation will reduce 2017 reported revenue and underlying operating profit by around £984m and £77m, respectively.

"Compass continues to have a good year. Revenue growth in North America is strong, Europe is accelerating as expected and Rest of World is progressing well. Better than planned margin improvement in Rest of World, is offsetting a more difficult volume and cost environment in Europe.

"As a result, our full year expectations are unchanged, with organic growth above the middle of our 4-6% range, and modest margin progression. Looking to the longer term, we continue to be excited about the significant structural market opportunity globally and the potential for further revenue growth, margin improvement and continued returns to shareholders."

RBC Capital Markets, which rates the stock at 'outperform', said: "In a sector where diversification has generally caused mishaps, we believe Compass's focus on a single specialism, i.e. catering, is a key differentiator.

"The investment it has made in branding, sectorisation and procurement has meant it has grown faster, with higher margins than catering peers and especially those that have gone down the bundled services FM route. This is especially the case in the US, where it has benefited most from its third-party procurement arm. The strong retention rate also suggests Compass is doing something right in terms of both service and offering.

"Whilst the derating of 'bond proxies' is a risk, Compass is one of the better valued defensives in the sector and we expect trading to remain strong, with balance sheet options also available."