Caterer Compass' margin forecast disappoints after tasty results

By Yadarisa Shabong

(Reuters) -Compass Group on Monday forecast a 2023 margin below analysts' estimates as inflation bites, after the world's largest catering group reported financial results that beat market expectations.

Shares in the British firm were down 2% in early trade after the weaker-than-expected margin forecast despite Compass more than doubling its dividend and expanding its share buyback programme.

"We can restore the pre-pandemic margin, but the pace of that will really depend on the level of new business wins... and also when we see inflation start to come off a little," CEO Dominic Blakemore said in an interview with Reuters.

Compass has been grappling with higher costs of food and labour, and has been tackling soaring inflation by changing ingredients such switching from sunflower oil to rapeseed oil in the UK and reducing the number of options its menu offers.

The economic environment also means more companies are outsourcing their canteen needs, helping Compass gain new business and retain clients at a record rate.

Compass, which serves office workers, university students, patients and seniors in old age homes across 40 countries, said new business wins increased to 2.5 billion pounds, and first-time outsourcers accounted for about 45% of that, while the rest moved from competitors or smaller players.

Blakemore said conversations with clients include ways to reduce costs by cutting menu options, reducing portion sizes and limiting food waste, apart from price increases.

Compass forecast underlying operating margins of above 6.5% in 2023, compared with analysts average estimate of 6.9%.

"Compass needs to take a pragmatic view to this, because if it raises its prices too high then some of the benefits its customers enjoy start to evaporate," said Hargreaves analyst Derren Nathan.

Compass said it expected underlying operating profit growth on a constant-currency basis of more than 20% this year, surpassing pre-pandemic levels.

Revenue and volumes have already topped 2019 levels at the company, which operates food service brands such as Levy, Chartwell, and Flik.

Compass more than doubled its dividend to 31.5 pence for the year ended Sept. 30 and announced a share buyback of 250 million pounds.

It reported adjusted operating profit up nearly 88% to 1.59 billion pounds, beating the 1.54 billion pound company-compiled analysts' estimate.

Underlying revenue rose about 38% to 25.8 billion pounds, surpassing pre-pandemic levels and beating an analysts forecast of 25.1 billion.

($1 = 0.8467 pounds)

(Reporting by Yadarisa Shabong; editing by Savio D'Souza and Rashmi Aich)