EUR 850.00 For Business Accounts Only

Morningstar | Green Shoots in 1Q as Sodexo Delivers

With the bar reset in 2018, narrow-moat Sodexo’s fiscal 2019 first quarter saw organic revenue growth of 2.6%, in line with our expectations for the full year but ahead of the consensus numbers for the quarter. Management reiterated its full-year guidance, and we believe the generally positive commentary will go some way to reassuring investors following the profit warning in early 2018. We affirm our EUR 110 fair value estimate and believe Sodexo offers the most attractive opportunity in the food service space currently.

Divisionally, the North American healthcare and seniors and education businesses, the source of the 2018 profit warning, were the key areas of focus in this update. Both businesses, which saw revenue declines into the full-year results, recorded their first quarter of positive growth, rising 80 and 60 basis points, respectively, on an organic basis. Management commentary to the effect that the seniors‘ business in North America is still experiencing pressure on client retention would suggest that the company is not out of the woods; however, we take comfort from the solid retention in healthcare and the neutral effect of net new business in education, both areas that had led to declines in 2018. Management has work to do here in getting growth back on track over the course of the year, but the first step in recovery is always to stem the flow of blood.

Longer term, we believe Sodexo, as one of only two truly global players, is well positioned to benefit from several structural trends, including consolidation of the food service industry and the continued shift towards outsourcing of catering services in the private and public sectors.