With its name, I wouldn’t expect Compass Group to lose its way smoothly. But during a tumultuous four-week era before the first of the Covid-induced lockdowns in the UK, that’s precisely what many investors feared.
In the worst of the 2020 inventory market crashes as investors grappled with the onset of the pandemic, inventories at the world’s largest restaurant organization lost 43% of their price. about 10 times last year’s pre-tax earnings.
Perhaps unsurprisingly, investors were quick to conclude that the forced closure of schools and canteens and the near-total cancellation of hospitality and large-scale sporting events in the foreseeable long term would decimate Compass’ business.
That’s not what happened. Yes, for a while, around 55% of the group’s business was closed, it was forced to reduce prices by £500 million a month and had to turn to investors for a £2 billion capital increase. Yes, it put staff on leave, suspended dividends, and borrowed cash from the Bank of England’s special facility. And yes, earnings and operating profit have taken a hit, as part of what Compass described as the “profound effect” Covid-19 has had on its business.
But then, at the end of this month of July, just a few months after the pandemic began to change. Not only did Compass corporations reopen and contract retention rates were 95%, but opportunities opened up when corporations outsourced catering for the first time. time.
Compass was on its way home: only now, two full years later, are stocks reaching their pre-pandemic peak.
Andy Raikes, portfolio manager at equity fund TT UK, says: “We Compass has an incredibly compelling investment case and is a smart example of an even more powerful post-Covid startup than before. “
“First outsourcing” opportunities, or the use of a third party to prepare and prepare food, have been at the heart of Compass’ investment case, but never before have they been more obvious. At the start of the pandemic, Compass had a 10% share of the £220 billion food establishment market (the company’s estimate based on its own and external data), some of which is outsourced to third parties. This percentage is now likely to be slightly higher.
There are many reasons why Compass is reaping benefits now, adding the evolution of our lives as brokers, expanding health and protection regulations and inflation, making the prospect of corporations even serving them food in the corporate dining room a much less exciting prospect.
Claudia Quiroz, head of Quilter Cheviot’s sustainable investments team, owns Compass shares in her Quilter Investors Ethical Equity fund. She believes Compass is benefiting from outsourcing catering services “to reduce the pricing and complexities of the post-Covid environment, with always changing fitness protocols. “
Paradoxically, he argues that the tendency to run away from home helps, rather than hinders, Compass’ operations, as corporations do their best to inspire staff to return to the workplace. “more time in your facilities. We see that running out of the house is less of a fear for Compass,” she says.
TT’s Raikes notes that Compass has the added merit of being a ladder player. “Scale is a significant competitive merit in the industry, so corporations like Compass are positioned at the top to deal with demanding inflation situations and increased complexity, and are gaining significant market share,” he said. “In addition to accelerating the outsourcing trend, Compass is also reaping merits from the post-Covid recovery in the business spaces that have been most affected, so the total is experiencing a significant gain. growth. “
It’s also worth mentioning that about 70% of Compass’ contracts feature “dynamic pricing,” allowing the organization to pass on charge increases (e. g. , food value inflation) to its customers. The concept is also that the prices of the contracting company deserve they also fall when food is less expensive to prepare.
Compass was founded in the UK in the midst of World War II in 1941 as Factory Canteens Ltd, primarily to feed munitions workers. It was acquired through the Grand Metropolitan conglomerate in 1967, where it spent two decades until control bought the group’s contracts department in 1987.
It was indexed on the London Stock Exchange the following year, when Compass began a long era of acquired growth, which helped propel it into the ranks of the FTSE hundred blue-chip index a decade later.
The fashionable Compass operates in forty-five countries on 55,000 visitor sites, serving approximately 5500 million hungry meals a year. In addition to serving the public and personal sectors, for example by operating NHS canteens and serving school dinners, Compass joins the hospitality sector. , meals at the Wimbledon tennis championships, as well as a number of racetracks adding Cheltenham, Newmarket and Aintree.
Reflecting the diverse nature of the sectors it targets, the organization is divided into five activity spaces. The top two revenues are industry and industry and fitness and senior apartments, followed by education, then advocacy, remote and offshore spaces, and sports. and recreation.
This setup underscores the resilience of a giant portion of Compass’ revenue. During pandemic shutdowns, for example, sports and recreation were absolutely closed and most educational institutions, businesses, and industry were also closed. But given their nature, fitness divisions
Compass is a popular list among the world’s most successful fund managers, 29 of whom own the shares. At least 8 of its budget is devoted to environmental, social and governance issues, in addition to the Royal London Sustainable Leaders Trust, led by Michael Fox.
Although Quiroz has invested in Compass since 2015, most of the elite managers in the shareholder registry have bought much more recently. Fox, for example, first bought shares in March 2020 and then ended its stake. Raikes bought in January and also higher his position since then.
Compass is exposed to several trends that are expected globally over the next 30 years. In the context of social and demographic replacement, or the changing demographic dynamics of the global, the organization is exposed to the themes of emerging prosperity, migration, and relocation. and the creation of virtual societies.
In practice, this means that it serves food to other people who, over time, become richer and live in more urban areas. It has a virtual orientation, as it has several smartphone programs for ordering food in the workplace, adding on the New York Stock Exchange. Interchange.
Compass is also exposed to advances in new agricultural and food technologies, a key issue that is part of Fix the Future’s climate and environmental megatrend. waste.
The band has found itself in the headlines for all the wrong reasons, adding that it fell under the blow of celebrity chef Jamie Oliver, Boris Johnson and Manchester United footballer Marcus Rashford. In 2006, Oliver used his television series Channel Four School Dinners to advertise that Compass was serving turkey Twizzlers, a product with dubious nutritional benefits, in school canteens. The controversy cost Compass millions in lost sales and led the government to devote £220 million to improving the quality of menus and school chefs.
Then, early last year, Compass subsidiary Chartwells found itself in trouble over the length of food packages it delivered to families rather than school meals loose from the coronavirus-induced shutdown. Prime Minister Labour and Rashford condemned the packages, which the United footballer called “unacceptable” and Johnson called “shameful”.
Compass apologized and said it would increase the amount of food in the packages after the government increased its emergency allowance to help improve rations. A month later, Compass said it served breakfasts and lunches to eligible youth during the last national shutdown, at its own expense, and would continue service in the next mid-session recess.
The scandal has destabilized sustainable and moral investors and an organization of them, adding M
Sustainability is playing a central role in restoration activities, partly due to the development of visitor demand.
As Raikes says: “Compass recognises the vital role it will have to play, as one of the most important players in the global food industry, in driving the transition to healthy and sustainable food intake across the planet.
“It does this in a number of ways, adding the sale of plant-based foods [that emphasize but are not limited to plant-based foods], reducing food waste, culpable sourcing, reducing packaging, and accelerating the use of sustainable foods at the expense of those of a single product. use and plastics based on fossil fuels.
“Interestingly, this orientation towards sustainability is aligned with the wishes of your customers and is becoming a vital driving force for your company’s growth. For example, the company recently said that 70% of the tenders [requests for proposals] it submitted in the UK cite sustainability as vital. »
Quiroz adds, “Catering is an attractive segment from a guilty investment perspective, as we see more and more sustainable skills issues, such as the ability to supply source food, plastic-free packaging, and healthy features for employees, resulting in contracts.
“There is evidence that healthy nutrition reduces days of poor health and leads to a more motivated and productive workforce. Outsourcing catering also allows for a stricter supply chain and means greater practices when it comes to food waste and packaging.
As part of its sustainability agenda, Compass promises to halve food waste by 2030, use eggs completely out of the cage by 2025 and ensure that one hundred percent of its palm oil is sustainable, that is, without deforestation or netting. Crash: until the end of this year. It aims to reduce its Scope 1 and Scope 2 emissions (direct and indirect) by 46% by 2030 and reach net-zero emissions by 2050 in line with the commitments of the 2015 Paris Agreement.
It still has a long way to go in some respects: at the end of last year, 28% of its palm oil did not qualify as sustainable and only 25% of the eggs served in shell were outside the cage. But it’s making impressive progress in other areas, adding to providing at least one healthy meal at 87% of its food service sites and reducing its food service (from the more than 2,000 sites where it’s registered) to 28% last year.
Quiroz says he likes the clarity and ambition of Compass’ Sustainability Goals and has created a forged framework to report on its progress to investors. “because we consider water control to be also a key challenge for sustainability along the food price chain. “
Compass’ fiscal year spans 12 months through the end of September, so the last two sets of annual effects have left strong scars from the more pronounced era of the pandemic and national lockdowns.
However, within them, there are encouraging movements. The fitness department and apartments for seniors, which includes hospitals and retirement homes, experienced a brief drop in profits between April and June 2020, but then recovered without delay, growing 1. 5% year-on-year. -year and publication of falsified profit expansion rates in the next year. quarter.
The defense unit, whether offshore or remote, was most affected. But after returning to expansion early last year, it also rebounded strongly, generating healthier biological expansion rates than before the outbreak of the pandemic.
Now, it is true that these two divisions are compass’ maximum resistance, but they also work in the types of spaces (serving food on oil platforms and in the soldiers’ dining room, for example) where expansion is sometimes more pedestrian. 3 sets of businesses began to recover, regained their momentum very quickly.
At the time of the group’s third quarter announcement update late last month, the group’s underlying profit exceeded pre-Covid grades and Compass’ operating margin was 6. 2%, an increase of 2. 8 percentage points from the end of March last year and heading towards where it was before the pandemic.
To give an additional boost, the company reported an accumulation of new business of 9. 1% in the three months to the end of June, higher than the 7. 9% accumulated in the year before the beginning of Covid-19.
Prior to the most recent crisis, Compass was known for its ability to generate solid single-digit growth in biological earnings, complemented by normal acquisitions in its fragmented market. The way the company recovered over the past two years suggests that the effects that will be remembered in the long run will be even greater and marked by healthy expansion.
Compass is definitely listening to some of Fix the Future’s big global themes: population expansion, emerging wealth, and an increased interest in fitness and wellness, to name just three. It also seems to be well placed to take advantage of the structural expansion of its markets. as more corporations and organizations turn to an entrepreneur to feed their staff.
Does it mark the future? In fact, it requires a commendable technique in its operation: buying food from local suppliers, prioritizing protection and diversity in the office for its work, and redistributing its surplus food to local communities in need, for example. Will Compass serve nutritious food in office restaurants?30 years from now? When it comes to some of the most successful fund managers in the world, to the fullest in fact.