Compass shares slump as caterer serves up warning on Europe

By Indranil Sarkar and Noor Zainab Hussain

(Reuters) - Compass Group <CPG.L> warned on Tuesday that deteriorating consumer and business confidence in Europe had hurt volumes and margins at its company catering services, sending shares almost 8% lower.

The world's biggest catering firm, which provides meals for office workers, armed forces and school children in 45 countries, said it expects 2020 organic revenue growth around the mid-point of its 4-6% guidance range.

The lacklustre outlook took the shine off a 4.7% rise in underlying operating profit to 1.88 billion pounds for the year ended Sept. 30, helped by growth in North America and the UK defence and sports and leisure businesses.

"Consumer confidence (in Europe) continues to decline and a number of key clients, notably in manufacturing, automotive and financial services, have reduced their headcount in recent months," the company said in a statement.

Catering for business and industry brings in 39% of revenue with Compass counting Alphabet Inc's Google <GOOGL.O>, Boeing Co <BA.N>, Microsoft Corp <MSFT.O> and Chevron Corp <CVX.N> among its clients.

Chief Executive Officer Dominic Blakemore said Compass' overall expectations for 2020 were positive but it remained cautious about economic conditions in Europe.

Compass, which competes with France's Elior <ELIOR.PA> and Sodexo <EXHO.PA>, said it would cut costs in the region, resulting in a total non-underlying charge of about 300 million pounds.

Of that, 190 million pounds was incurred in 2019, it said, partly accounted for by a 120 million pound hit on structurally loss making contracts.

Compass said it would take measures to ensure a "right sized labour model" for the future, without giving further details.

"These are an unusually eventful set of numbers for Compass," said Nicholas Hyett, Equity Analyst at Hargreaves Lansdown, adding that the cost of getting the company in better shape to weather any coming storm was unexpectedly high.

"When shares are priced at a premium ... even the smallest slip can startle the market, with potentially painful consequences," he added.

Compass shares trade at an estimated price-to-earnings ratio of 25, compared to a sector average of 22, according to Refinitiv Eikon data.

The pipeline of new contracts in North America is strong and its 'Rest of World' segment was growing well, Compass said, but warned it some clients in Europe were hesitant to make decisions.

Compass, which serves 5.5 billion meals a year, also increased its annual dividend. The group is one of 26 current bluechip companies to have hiked its annual payout every year for the last decade.

(Reporting by Indranil Sarkar and Noor Zainab Hussain in Bengaluru; Editing by Sherry Jacob-Phillips, Kirsten Donovan)