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Compass PLC has a strong investment thesis with its revenue being recurring, diversified geographically and service-wise, and featuring a sticky and positive growth nature. The margins are equally steady with pricing power and scale economics while the decade-long conservative financing should lead to great shareholder distributions. The food services company boasts a superior margin and a leading growth rate, making it the best in its business. The only risk to the thesis is Management not hitting the 1% EBITDA-M needed for a bullish view of the business.
Compass Group PLC provides food and support services across the globe. The company caters to a variety of sectors, including business and industry, healthcare and senior living, education, sports and leisure, defense, offshore, and remote sectors. The pandemic saw the company experience a steep decline in revenue, falling by 20% in FY20 and a further 10% in FY21. However, the diversified nature of the company’s revenue and its exposure to healthcare and senior living allowed Compass to remain resilient.
Compass boasts a diversified client base, with no single industry having over 35% of its revenue. The company has a high retention rate, with 94%+ retention across all geographies. This makes Compass’s revenue stream very low risk, as it is mostly recurring. The company’s focus on offering a wide variety of services makes it well-positioned to capitalize on the increasing trend of outsourcing services, including food and facilities management. Consumers’ increasing focus on health and wellness and healthier food options represents an opportunity for growth for Compass.
The pandemic and inflationary pressures have resulted in a tightening of margins, with EBITDA-M at 7.5%, 100bps below what was achieved in FY18. The company needs to right this underperformance rapidly, as Management concurs.
