EUR 850.00 For Business Accounts Only

Morningstar | Increasing Our FVE for Sodexo to EUR 117; Attractive Opportunity Remains

As one of only two global food service providers in a highly fragmented market, Sodexo is well positioned to benefit from the outsourcing trend that has pervaded developed markets in recent years. Sodexo has also been successful in taking market share from smaller, more local providers that cannot match the operational capabilities and proprietary knowledge that come from operating on a global basis.Where Sodexo differs from peers is in its strategy of pursuing integrated contracts, combining various facilities-management activities with food-service contracts. Over time, this has led to a more diversified revenue base, with food service now comprising two thirds of group revenue, down from nearly 80% in 2005. There are also several other benefits from this approach, as integrated contracts, by virtue of their increased complexity, are generally longer in length than single service contracts; for example, the recent $2.5 billion Rio Tinto contract win in the Pilbara region in Australia is a 10-year contract (in which Sodexo will effectively manage a number of entire towns, incorporating accommodation management with transport, food, and cleaning services). In addition, by embedding themselves into more of their clients' activities through integrated contracts, food-service companies can further reduce the ease with which clients can switch suppliers or obtain price checks, as the price per service is obscured. We believe this will help to further improve upon Sodexo’s already-impressive client retention rate.Lastly, another differentiator and strong source of growth for Sodexo comes in its benefits and reward service division. Despite comprising only 4% of group revenue, this division contributes more than 20% to the group EBIT line. This business effectively issues prepaid vouchers (or cards) to employees on behalf of their employers, offering a tax-efficient solution for rewarding employees. This business is particularly asset-light, and as a result, it generates EBIT margins north of 35%. While local and regional players operate in this sector, there are just two firms with global capabilities in this extremely scalable business.