If investors in Compass Group had been hoping for an early bounce-back from the Covid-19 crisis, they would have been left disappointed by yesterday’s update. As well as reporting a 44 per slump in third-quarter underlying revenues, it predicted a continuing “slow recovery scenario” outlined in May (Dominic Walsh writes).
All of which is uncharted territory for the world’s biggest catering group. Although not immune to the impact of economic and geopolitical upheaval, Compass has over the years deployed its huge scale and geographical spread to good effect, churning out quarter after quarter of strong numbers and rewarding investors with billions of pounds in dividends and share buybacks.
Compass operates in 45 countries and before the lockdown was serving 5.5 billion meals in work canteens, schools and universities, on offshore oilrigs, in the defence sector and at sporting events. It employs 600,000 people and last year generated revenues of more than £25 billion.
Covid-19 has driven a coach and horses through those advantages. The virus is no respecter of borders or sectors and the lockdowns brought in across most of its markets have forced the FTSE 100 group to dispense with forward guidance. If ever a company was guaranteed to issue detailed guidance on organic revenues and operating margins and meet or exceed it, it was Compass.
No longer. Yesterday the headline third-quarter numbers were decline in revenue and an operating margin of minus 6.3 per cent. With the pace of a recovery “still unclear”, it was at least encouraged by signs of relative improvement in June, with the number of outlets open increasing from 55 per cent to 60 per cent and retention “robust” at 95 per cent.
By sector, its performance in healthcare, defence and offshore was “good”, but education and business and industry were mostly closed in April and May before starting to reopen “cautiously” in June. Sport and leisure remained fully shut.
Another ray of light amid the gloom was its comment that it is seeing signs of an acceleration in first-time outsourcing opportunities as companies and venues seek to cut costs by using an outside contractor.
The FTSE 100 group has itself taken stringent measures to cut costs and strengthen its financial position, including scrapping the dividend, cutting boardroom pay and putting staff on furlough. In May it raised £2 billion of new equity at £10.25-a-share — a little below today’s price of £10.69½ — to give it £5 billion of liquidity to “weather the crisis”.
Amid the cost cutting, Compass makes no mention of job losses but there are plenty of phrases that imply they are happening. It said that it was spending £42 million in the third quarter in “resizing costs in North and South America”.
In Europe, where lockdown measures have been “deeper and more widespread”, the reopening has been slower as people continue to work from home or remain on furlough. Its operating costs in reopened units are higher and it is working with its clients to pass these on, but it said that with a less flexible workforce it was having to “actively manage the situation” and progress in Europe would be slower.
In the UK, Compass is understood to have made about 350 of its UK employees redundant as a result of the Covid-19 lockdown. That is fewer than 1 per cent of the catering group’s 60,000-strong British workforce, a surprisingly small number given the pandemic’s impact, although with a “slow recovery”, the figure could rise.
In early May this column recommended that investors avoid Compass and the shares have fallen a further 17 per cent since. It is still difficult to advise investors to buy into what is undoubtedly a quality business in this environment.
Advice Avoid
Why A best-in-class business that will return to growth and restore returns to shareholders, but not yet
RSA Insurance
The insurance industry is in the eye of the coronavirus storm (Ben Martin writes). Lloyd’s of London, the world’s biggest insurance market, has estimated that the crisis could deal a $203 billion blow to the industry. Yet it is not all doom and gloom. RSA Insurance even gave investors cause to be optimistic yesterday.
RSA is one of Britain’s leading insurers, listed in the FTSE 100 and with operations overseas, including Scandinavia and Canada. Stephen Hester became chief executive in 2014, when he was asked to transform RSA after several profit warnings and an accounting scandal at its Irish business before he joined.
While he succeeded in reviving the group, performance at its British arm weakened. It is also wrestling with the fallout from Covid-19. There was good news on this front when RSA posted its first-half results yesterday. It said the net impact of the virus was expected to be “neutral” once the impact on claims, premiums and investments were taken into account.
Lockdowns have led to fewer claims in some areas, such as motor cover, where fewer cars on the roads led to fewer accidents. Non-Covid related claims frequency was down by between 15 per cent and 60 per cent year-on-year in the second quarter.
This helped to offset the impact of virus-linked claims, such as weddings insurance, and the impact on RSA investments.
Net written premiums dipped 3 per cent to £3.1 billion after coronavirus pushed down prices and led to some refunds. Overall, pre-tax profits were down 7 per cent to £211 million and RSA shares fell 4.2 per cent to 420p.
RSA has set aside £47 million to cover claims under business interruption policies. The pandemic has not triggered many of these policies across the industry, angering business customers. The Financial Conduct Authority has brought a test case in the High Court to resolve the dispute, with which RSA is involved.
RSA scrapped its dividend earlier this year after pressure from the Bank of England, which is concerned about insurers conserving cash amid the crisis. RSA said yesterday that it “expects to resume dividends by the time of full-year results 2020”.
Advice Hold
Why Uncertainty over disruption and dividend
