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19 July 2021

End of Restrictions Boosts Compass Group

Compass Group is the world’s largest contract foodservice company and provides meals in locations such as schools and universities, offices, factories, hospitals and major sporting events, among others. Clearly, the COVID-19 pandemic has had a profound impact on the firm’s operations, with the vast majority of sectors in which the firm operates closed since the first lockdown was imposed. In fact, during its two latest half-yearly trading updates, the company saw revenues decline by 40.5% and 32.4%, respectively, as the initial impact weighed significantly on operations, which eased slightly as of March this year when countries started to lift restrictions once again.

While the firm’s healthcare and defence, offshore and remote segments have shown continued resilience throughout the pandemic owing to its defensive governmental contracts, the majority of its business has struggled. Management will have, then, been very much looking forward to the UK Government’s final stage of its lockdown easing plan, with all restrictions now finally removed, paving the way for a full recovery for Compass.

However, given that one of the inevitable characteristics of a full reopening is that cases will start to rise, building on the exponential increase in recent weeks, certain locations may be subject to localised lockdowns. If an outbreak were to be identified at a university or office block, we could see a swift, short-term removal of people from the premises. While this is unlikely to affect Compass in the long-term, a constant stop-start impact to its operations across many locations could hamper the speed of a full recovery and reduces certainty for the business going forward.

However, the long-awaited return of sporting and cultural events will certainly provide a significant boost for the company after it lost nearly all of its revenues from the segment as of the latest quarter. Given that such events are often one-offs or occur on a weekly basis, they will not be subject to the same localised lockdowns that individual offices may be and should help the company to improve its consistency.

This added reliability should help the firm return to the solid, dependable investment it once was. The company has a long history of growing its business sustainably; entering new markets and geographies and rewarding shareholders in the process with a stock that has been able to provide solid share price gains, as well as a strong dividend. While the dividend aspect of the company’s stock has clearly diminished somewhat since the start of the pandemic, we would expect a return of the income payments as soon as the company shows signs of sustainably getting back on its feet.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
End of Restrictions Boosts Compass Group
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