EUR 850.00 For Business Accounts Only

Morningstar | Narrow-Moat Compass Reports Solid FY Results

Catering giant Compass Group served up a solid set of full-year numbers, with organic revenue growth of 5.5% and an operating margin of 7.4%, in line with 2017 levels. These results were almost bang in line with our forecasts for the period; and with the outlook for 2019 in line with our medium-term expectations for the firm, we do not expect to make any material changes to our numbers. We reiterate our narrow-moat rating for the company and our GBX 1,670 fair value estimate. We believe the shares offer only modest upside from here.

While a weak Sterling, reversing the trend of previous years, impacted statutory numbers, the underlying performance was impressive. Client retention hit 94.9% over the period, slightly above the 94% long-term average rate, while new business growth peaked at 9.1%, again a modest improvement on the 8.7% average historical level. While some investors may take exception to the lack of margin growth over the period, given inflation cost pressures in large regions such as North America and the U.K., we view steady margins as a result. We also take heart from a number of large and high-profile contract wins over the period, such as Lockheed Martin in the U.S., Honda in Canada and Total in a number of regions. National and multinational contracts can often present a double-edge sword, with potentially less pricing power when dealing with large firms; however, we believe that these contracts also enable a higher level of integration and dependency on catering providers, thus increasing switching costs, a core moat source for Compass Group.