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19 May 2020

Compass Group Results Update

Saul Fulda, Investment Analyst

Come May, Compass Group, the largest food service company in the world, would usually be preparing its customary strawberries and cream for Wimbledon. Not so this year. 

During April, Compass saw c.55% of its client base temporarily shut up shop, with organic revenues plummeting 46.1% and profits tumbling 23%. However, it would be unwise to ignore Compass’s performance in the pre-COVID-19 world - for the five months to the end of February, the group witnessed 6% revenue growth.

Investors should not be too surprised that Compass has launched a £2bn equity raise, which sits alongside the £600m already accessed from the Government, and the £800m extension to the revolving credit facility. Together with the successful waiver of leverage and interest cover covenants, this should reinforce the balance sheet and ameliorate liquidity. 

Yet, structurally, the outlook remains highly uncertain. If more people work from home in the future, Compass could have a problem since over 25% of revenue is sourced from serving white-collar workers. Moreover, some of the lost demand caused by the pandemic, such as demand from education and sports venues (which together account for 31% of revenue), will return but only in the longer term and with social distancing measures in place. 

In the meantime, Compass has taken necessary steps to ensure its survival, cutting director pay, cancelling dividends and mitigating costs by £500m per month. 

Please note that investments and income arising from them can fall as well as rise in value and you may lose some or all the amount you have invested. Past performance and forecasts are not reliable indicators of future results or performance. Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the companies mentioned.
 
Compass Group Results Update

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