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Morningstar | Industry Leader Compass Serves Up a Solid 3Q

Catering giant Compass Group put further distance between itself and the difficulties faced earlier this year by peers Sodexo and Elior Participations with another solid third-quarter update. Organic revenue growth hit 5.1% on an adjusted basis in the third quarter, in line with our expectations and management’s guided range of 4%-6% for full-year 2018. We do not expect to make any material changes to our forecasts, nor to our GBX 1,670 fair value estimate, on the back of these results. We reiterate our narrow moat rating for the company.

North America, Compass’ largest and fastest-growing division, continued in a strong fashion, with organic revenue growth of 7% in the third quarter. Healthcare was one of the areas credited with the strong divisional performance, while the company also reported wins in education to come through in the fourth quarter. To us, this is a further indication that Sodexo’s issues in these areas are largely self-caused. Europe saw a material pickup over the period, admittedly off a low base, with organic revenue growth increasing from 0.5% at the first half to 3.2% in the third quarter. Rest of world continued to improve in 2018, following two years of revenue declines as a result in weakness in the offshore and remote segment. From a margin perspective, investors may be slightly disappointed to hear that group margins were down a touch year over year, as strong inflation in the U.K. has eroded margin gains from the rest of world division. However, with cost actions taken in the U.K. and further contract wins to materialise in North America in the fourth quarter, flat to slightly improved margins in full year 2018 are still a possibility.

As the industry leader, both in terms of size and profitability, we believe that in the longer term, Compass group is well positioned to benefit from several structural trends, including consolidation of the food-service industry and the continued shift towards outsourcing of catering services.