Morning Note: Market News and a positive update from contract caterer Compass Group.
Market News
US equities bounced last night – S&P 500 (+1.6%); Nasdaq (+2.7%) – as confidence grew over a potential Federal Reserve interest-rate cut in December following dovish comments from committee members. Google owner Alphabet continued to power higher on news that Meta Platforms is considering spending billions of dollars Google’s AI chips.
Gold was also spurred on by talk of lower rates and currently trades at $4,120 an ounce, while 10-year Treasury yield fell to 4.05%.
In Asia this morning, equities also moved higher: Nikkei 225 (+0.1%); Hang Seng (+0.7%); Shanghai Composite (+0.9%). Presidents Donald Trump and Xi Jinping held their first talks since agreeing to a tariff truce last month.
The FTSE 100 is currently little changed at 9,547, while Sterling trades at $1.3120 and €1.1380. Reports suggest Rachel Reeves will cut the amount Britons can save in their tax-free cash ISA each year to £12,000 to get households to invest more in UK stocks.
Russia and Ukraine bombarded each other’s territories, just hours after Donald Trump sent an upbeat signal on prospects for a ceasefire deal. Brent Crude trades at $62.50 a barrel.
European car sales rose for a fourth month in October, driven by increases in Spain and Germany, while the UK and Italy stagnated.
Source: Bloomberg
Company News
Compass Group has released results for the financial year to 30 September 2025 which were slightly better than market expectations. The company delivered double-digit operating profit growth and very strong free cash flow, driven by strong new business performance. Although investors are unlikely to see a resumption of share buybacks any time soon, we believe the current strategy of reinvesting in the core business, both organically and M&A, is good capital allocation and will generate strong cash flow over time. In the meantime, the dividend has been pushed up by 10%. The company has set out new guidance for FY2026 – it expects underlying operating profit growth of around 10%, driven by organic revenue growth of around 7.0% and ongoing margin progression. Ahead of this morning's analyst call, the shares are trading 2% lower.
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 financial year to 30 September 2025, the group continued to capitalise on dynamic market trends, using its proven competitive advantages to drive higher revenue and profit growth.
Revenue grew by 8.7% to $46.1bn, just above the market expectation of $45.4bn. Organic revenue – a combination of like-for-like volume growth, price, new business, and client retention – grew by 8.7% versus the company’s full-year guidance of ‘above 8%’. The pace of organic growth rose slightly in H2 (+8.9%) versus H1 (+8.5%).
The group benefitted from strong outsourcing trends, with net new business growth of 4.5%, above the historical level of 3%, with particularly strong growth in North America and client retention of 96.3%. The company secured new business of $3.8bn, an 11% increase year on year. First-time outsourcing trends continued, with a strong pipeline of new business opportunities. Compass saw like-for-like volume growth of around 1% as it continued to benefit from the quality of its offer and the value gap compared to the high street. Pricing growth was up around 3%, in line with inflation.
As of this year, the company has changed its internal management reporting structure, with the Rest of World combining with Europe to form a new International region. The group’s largest region, North America (68% of revenue), is unchanged. Compass has also reshaped its portfolio to focus on growth opportunities in attractive markets – a number of non-core markets have been exited, including Brazil, Mainland China and Mexico. The disposal programme is now complete.
In the last year, North America grew by 9.1% in organic terms, an acceleration from the first half (+8.6%). The region benefited from particularly impressive organic growth in the Business & Industry sector. In the International division, organic revenue was up 7.7%. This is slightly below the group’s first half (+8.4%) due to the timing of mobilisation of new contracts. Encouragingly, client retention rates were 95%, significantly higher than the pre pandemic level.
The group’s flexible cost base has helped the margin to recover from pandemic lows despite re-opening expenses, the cost of mobilising new contracts wins, and inflationary pressures. The group’s margin grew by 10 basis points to 7.2%, driven by continued operating efficiencies and the benefits of greater scale. In the second half, the margin was 7.3%.
Operating profit grew by 11.7% to $3,335m, versus guidance of growth ‘towards 11%’, and slightly above the market forecast. EPS was up 11.1% to 131.9c, in line with the consensus forecast of 131.6c.
The business continued to generate strong free cash flow, up 13.5% to $1,975m in the year, and well above the market forecast. The group spent $1.5bn on capex, 3.3% of revenue. As Compass 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 in FY2025 was $1.3bn, the majority relating to Dupont Restauration (France) and 4Service (Norway). The integration of the recent acquisitions is ahead of schedule with M&A contributing to profit growth. Most recently, subject to regulatory clearance, the company has agree to spend €1.5bn on Vermaat, a leading premium food services business in Europe which will be used to create a strong growth platform in the region.
At 30 September, financial leverage was 1.4x net debt to EBITDA, within the medium-term target of 1.0x-1.5x. Including the Vermaat deal, Compass anticipates its leverage will be around 1.5x net debt to EBITDA at the end of FY2026 (at the upper end of its target), before falling in FY2027. Although this clearly reduces the amount of excess cash flow available for share buybacks in the near term, we believe reinvesting in the core business is good capital allocation and will generate strong cash flow and returns over time. In the meantime, the company continues to pay an attractive dividend – the FY2025 payout was increased by 10.2% to 65.9c, equal to a yield of 2%.
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, the threat of higher unemployment, 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% is 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 (recently expanded) $360bn 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.
Compass has introduced new guidance for FY2026 – it expects constant currency underlying operating profit growth of around 10%, driven by organic revenue growth of around 7%, around 2% profit growth from M&A (including Vermaat), and ongoing margin progression. Overall, the company remains ‘very positive’ about the significant runway for long-term growth. 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
