What the Market is Saying
We are cautious on the sector outlook, with short-term risks associated with Covid-19 and Medium-term risks around working from home, and delivery exacerbated by the lockdowns. We rate Compass above sector peers.
We expect Compass's update to be taken well, as Q3's -44% organic sales is in-line, but the June exit rate of -37% and the 20% drop-through are better than expected, as is Q3's breakeven operating cash burn. The company does not give a split between LfL sales and new business wins, but retention remained strong (and unchanged) at 95% and the company has continued to win new business throughout the Covid-19 disruption period (a “flight to trust”). We are relatively positive on the contract caterers as we think revenue will be quicker to recover to pre-Covid levels compared to the rest of our coverage given their demand is more local, essential and non-discretionary.
Compass reported Q3 results this morning. Growth was in line (nothing incrementally negative) but there was a positive message on first time outsourcing opportunities, margin and cash.
Compass now has £5bn of liquidity, still plenty to weather a second wave of lockdowns. This might again lead some to question the capital raise but means any balance sheet risk is very remote.
Bank of America:
While recovery should be gradual, we think Compass has taken right decisions to reinforce its industry leadership position. We also see opportunities for the group in first time outsourcing as well as gaining market share from smaller players. Valuation appears undemanding with the shares trading at c6% FCF yield in FY21E.
On profitability, Compass reported an improvement in operating margin within the quarter, as the drop through improved further to 20% in June, vs 23% in April (3rd improvement since the beginning of COVID and down from initial guidance range of 25%-30%). Better performance on cost gives scope for some upward revisions in consensus, only partially offset by FX which at spot is expected to impact operating profit by <£20mn. The company added that margin recovery was strongest in North America given a balanced end market exposure and most flexible labour laws. In Europe, higher exposure to B&I, stricter containment measures and a less flexible work force are posing headwinds to margin recovery which is expected to lag North America.