Morning Note: Market news and updates from Compass Group and Imperial Brands
Market News
US equities rose last night – S&P 500 (+0.7%); Nasdaq (+1.6%) – with Nvidia and Advanced Micro Devices advancing on news they would supply semiconductors to a Saudi Arabian AI firm for a $10bn data-center project. The US-Saudi pact includes defence sales valued at almost $142bn, the White House said. President Trump hailed a ‘golden age of the Middle East’ as he urged nations of the region to abandon conflict and embrace prosperity in partnership with the US, led by the example of his hosts in Saudi Arabia.
President Trump cited the softer-than-expected inflation report to again pressure Fed Chair Jerome Powell to lower interest rates. The ECB will probably cut rates by the summer as trade tensions aren’t fueling inflation, according to Francois Villeroy. The 10-year Treasury yields 4.47%, while gold slipped to $3,234 an ounce.
In Asia this morning, markets were generally firm: Hang Seng (+2.1%); Shanghai Composite (+0.8%); Nikkei 225 (-0.1%), while the FTSE 100 is little changed at 8,956. Sterling trades at $1.3330 and €1.1885.
NATO countries are progressing toward spending 5% of their GDP on defence costs by 2032, people familiar said. The target matches a demand made by Trump. NATO foreign ministers meet in Turkey today and tomorrow ahead of a summit in June.
Source: Bloomberg
Company News
Compass Group has released results for the financial half-year to 31 March 2025. The company delivered strong new business and double-digit underlying operating profit growth. Performance in the key North American business remains resilient. Guidance for FY2025 has been reiterated and the company remains confident in its longer-term targets. There is no buyback announced which may be a disappointment to some, although we believe reinvesting in the core business is good capital allocation and will generate strong cash flow over time. Ahead of this morning's analyst meeting, the shares are down 3%.
Compass is the world’s largest foodservice company, operating in around 30 countries, serving over 5.5bn meals a year. The group also operates a targeted support services operation, which accounts for 15% of revenue, and a third-party food purchasing business. The company reports in US dollars, but its shares are listed in the UK.
During the latest half-year, the group continued to capitalise on dynamic market trends, using its proven competitive advantages to drive higher revenue and profit growth.
Revenue grew by 8.2% to $22.6bn, in line with market expectations. Organic revenue – a combination of like-for-like volume growth, price, new business, and client retention – grew by 8.5% versus the company’s full-year guidance of ‘above 7.5%’. As expected, the pace of growth slowed slightly in Q2 (+7.8%) versus Q1 (+9.2%).
The group benefitted from strong outsourcing trends, with net new business growth of 4.4%, above the historical level of 3%, supported by an improved performance in Europe and client retention rate of 96.2%. The company secured new business of $3.6bn, an 8.5% increase year on year. First-time outsourcing trends continued (45% of wins), with a strong pipeline of new business opportunities. Compass saw like-for-like volume growth of around 1% as the group continued to benefit from the quality of its offer and the value gap compared to the high street. Pricing growth was around 3%, more in line with inflation.
As of this year, the company has changed its internal management reporting structure, with the Rest of World combined with Europe to form a new International region. The group’s largest region, North America (c. two thirds of revenue), is unchanged.
In the six months to 31 March 2025, North America grew 8.6% in organic terms to $15.5bn. Although the business saw a slowdown in Q2 (+7.3%) versus Q1 (+9.7%), this was expected, and there was no commentary regarding some of the issues rival Sodexo alluded to in its recent update. In fact, the company highlighted that the Business & Industry division performed particularly well, underpinned by an excellent net new business performance and its compelling quality and value proposition.
In the International division, organic revenue was up 8.4% to $7.1bn, with Q1 and Q2 growing at the same pace. Compass has continued to reshape its portfolio to focus on growth opportunities in attractive markets – the group has exited a number of non-core markets, including Brazil and Mainland China and during the current year has completed its portfolio reshaping following divestments of Chile, Colombia, Mexico, and Kazakhstan.
The group’s margin grew by 10 basis points to 7.2%, driven by continued operating efficiencies and the benefits of greater scale. Operating profit grew by 11.6% to $1,627m, in line with expectations, with EPS up 10.6% to 64.5c.
The business continued to generate strong free cash flow, up 5.5% of $743m in the half-year. The group spent $1.7bn on capex, 3.0% of revenue. Financial leverage was 1.5x net debt to EBITDA, within the medium-term target of 1.0x-1.5x, following the completion of its $500m share buyback programme last December. For now, the company hasn’t committed to a further buyback programme, maybe a disappointment to some.
The group is also paying an attractive dividend – the FY2024 payout was increased by 13.7% and a H1 FY2025 payout of 22.6c, up 9.2%, has been declared today.
As the group focuses on the significant structural growth opportunities in its core markets, it has stepped up its M&A activity to expand its portfolio of brands, focusing on digital innovation and delivered-in solutions. Expenditure on M&A for the financial year to date is $1.1bn, the majority relating to Dupont Restauration (France) and 4Service (Norway).
The group is currently prioritising strategic acquisitions to further enhance its unique sectorised approach to clients. Management has a strong track record of successful M&A in North America and is using that blueprint to unlock growth in other regions. Although larger deals may reduce the amount of excess cash flow available for share buybacks, we believe reinvesting in the core business is good capital allocation and will generate strong cash flow over time.
Overall, Compass continues to show it has the flexibility to weather the uncertain macro-economic environment whilst continuing to invest in the business to enhance its competitive advantage, support long-term growth prospects, and further consolidate its position as the industry leader in food services. Investment in digital expertise is bringing benefits of increased new business wins, higher customer participation and transaction spend, reduced food waste and food cost, and increased productivity and staff retention. Although there are threats – permanently increased levels of working from home and online learning, higher unemployment in a downturn, and increased competition from delivery providers – we believe the company is well placed to cope, with the more cyclical Business & Industry unit now a smaller percentage of revenue than in the past (a third vs. a half) and a higher level of volume protection in contracts.
The scope for growth from first-time outsourcing and share gains is significant – nearly 75% still self-operated or managed by regional players – and the group currently has an excellent pipeline of new business. As the largest player (albeit with less than a 15% share) in the $320bn global market, Compass is well placed to consolidate its position as a trusted provider, able to offer clients and consumers safe and innovative solutions. Scale provides a vital advantage over smaller players, while companies and other institutions will be more open to outsourcing as they seek improved health and safety protocols, resilient food supply chains, and financially strong suppliers.
Although not immune to macroeconomic pressures, the company is confident in the resilience of its decentralised business model with predominantly local sourcing and supply chain
In light of the performance so far this financial year, the company has reiterated its guidance for FY2025 – high single-digit underlying operating profit growth on a constant-currency basis driven by organic revenue growth above 7.5% and ongoing margin progression.
Overall, the company remains ‘excited’ about the significant structural market opportunity globally. Management remains confident in sustaining mid-to-high single-digit organic revenue growth, ongoing margin progression and profit growth ahead of revenue growth.
Source: Bloomberg
Imperial Brands has released results for the financial half-year to 31 March 2025 which highlighted strong tobacco pricing more than offsetting volume declines. The company remains on track to meet expectations for the financial year to 30 September 2025 supported by tobacco pricing already taken and continued momentum in next generation products. The company has also announced that its well-regarded CEO is to retire and be succeeded by the current CFO – it is this the market has focused on this morning, with the shares down 7% in early trading. Although the CEO has been central to the group’s successful turnaround strategy, we believe the foundations are in place for the CFO to continue with the good work and generate strong returns for shareholders.
Imperial Brands manufactures and sells cigarettes, fine cut tobacco, smokeless tobacco, cigars, and next generation products. The main brands include Winston, Davidoff, L&B, West, and JPS.
In March, the company unveiled its new 2030 strategy which builds on the strong foundations of the current five-year plan which runs to September 2025. The strategy has two focused objectives:
- Drive sustainable value in combustibles where the company will continue to focus on its five largest markets – the US, Germany, the UK, Australia, and Spain – which represent 70% of adjusted tobacco operating profit. Within these markets, Imperial has identified specific areas for further investment by category, brand, and sales channel. The objective is to continue to maintain aggregate market share across these five markets with the aim of driving sustainable growth and cash delivery. By applying this same performance-driven, consumer-led approach to the wider portfolio of tobacco markets, Imperial expects them to make a greater contribution to overall performance over the next five years.
- Build scale in next generation products (NGP) – Imperial has now built a platform for a fast growing and agile NGP business with credible brands in all three categories (vaping, heated tobacco, and modern oral) and differentiated products available in all material markets where the group has distribution routes. Imperial will retain disciplined investment and market entry criteria as it builds a meaningful business with additional growth opportunities and strong profit and cash performance. For now, however, the business remains loss-making with no precise guidance on time to breakeven.
To support the delivery of its strategy, the company has identified further opportunities to create a simpler, leaner, and more agile organisation. These initiatives are expected to generate annualised savings of £320m by 2030, the majority of which will be reinvested to support the growth plans. The anticipated cash cost of these initiatives is £600m, with the majority of the spend, £500m, split between FY2027 and FY2028.
The new strategy will support the company’s medium-term guidance for growth on a constant currency basis: low-single digit tobacco net revenue growth and double-digit NGP net revenue growth; adjusted operating profit growth at around 3%-5%; adjusted EPS growth at a high-single digit rate, supported by a continued reduction in share count through the share buyback; and free cash flow generation of between £2.2bn and £3.0bn per annum.
Imperial Brands has today announced that Stefan Bomhard will retire as CEO and be succeeded as by Lukas Paravicini, currently CFO on 1 October 2025.
Back to this morning’s results. In the six months to 31 March 2025, tobacco and NGP net revenue grew by 3.2% at constant current to £3,664m. Tobacco net revenue grew by 2.7%, driven by strong price/mix (+5.9%). Volumes fell by 3.2% (to 87bn sticks equivalent) reflecting wider industry market size declines across the group’s footprint.
Aggregate market share rose by six basis points, ahead of the strategic objective, albeit widely varying performance. There were gains in the US (+10 bps), Germany (+65 bps), Australia (+5 bps) offset by declines in Spain (-90 bps) and the UK (-70 bps).
NGP net revenue grew by 15.4% at constant currency with growth in all categories. Strong growth in the US and Europe more than offset temporary headwinds in the AAACE region. The modern oral portfolio has grown strongly across all markets, including further share gains from the successful roll-out of Zone in the US.
Adjusted operating profit grew by 1.8% at constant currency to £1.65bn, versus guidance to grow in the low single digits at constant currency (i.e. 1%-2%) and a consensus forecast of £1.67bn. The performance reflects reduced NGP operating losses (down 14% to £43m) and a flat result at Logista, the Spanish-based distribution business in which Imperial has a 50.01% stake driven by a strong tobacco result offset by performance in long-distance transportation.
Adjusted EPS grew by 6.0% at constant currency to 123.9p as a reduced share count from the buyback (see below) more than offset higher finance costs.
The capital allocation framework includes investment in organic growth initiatives in combustibles and NGP, while continuing to evaluate opportunities for small bolt-on acquisitions, which will be focused on enhancing NGP capabilities. The capital intensity of the business will remain low with modest annual capex needs of £300m-£350m.
The 12-month free cash flow of £2.4bn reflecting strong cash conversion at 99% on 12-month basis. The company aims to maintain a strong and efficient balance sheet to support its investment grade credit rating with a leverage target at the lower end of 2.0-2.5 times net debt to EBITDA. During the latest half-year, net debt was fairly stable £9.96bn to leave financial gearing at 2.4x, on track to deliver around 2.0x at the year end. The all-in cost of debt modestly decreased from 4.2% to 4.1%, while interest cover was a comfortable 10.6x.
The company has a progressive dividend policy to provide a reliable, consistent cash return to shareholders. Dividends per share will grow annually considering underlying business performance. With today’s results, a half-year payout of 80.16p has been declared. The group has already committed to underlying dividend increase for FY2025 of 4.5% to 160.32p (6% yield).
Surplus capital is being returned to shareholders via an ongoing, ‘evergreen’ share buyback over the five years to FY2030. The Board will determine the quantum of future buybacks on an annual basis, in line with current practice, but has said they will be ‘material’. The current £1.25bn programme is expected to complete no later than 29 October 2025. Taking dividends and the buyback together, the company expects underlying capital returns to shareholders in FY2025 will amount to c. £2.8bn, almost 12% of its current market capitalisation. Overall, the group is on track to deliver five-year capital returns of c. £10bn, representing 67% of its market capitalisation in January 2021 when the strategy was launched.
The company remain on track to deliver its expectations for the financial year to 30 September 2025 supported by tobacco pricing already taken in the first half and continued momentum in NGP: tobacco and NGP net revenue growth of low single-digit in constant currency and to grow group adjusted operating profit close to the middle of the mid-single-digit range at constant currency (i.e. at a similar growth rate as last year). The company expects to deliver at least high-single-digit EPS growth for the full year and sustainable growth in cash flow.
Source: Bloomberg
