EUR 850.00 For Business Accounts Only

Morningstar | Narrow Moat Sodexo Dishes out Improvement in 1H

Narrow moat catering giant Sodexo's first-half results added a further data point to the recovery trend, following its early 2018 profit warning. Organic revenue growth of 3% was at the high end of management’s guided range of 2% to 3% for 2019, and the operating margin, at 5.9%, was a 40-basis point improvement on 2018. We reiterate our EUR 110 fair value estimate for the stock and still see attractive upside potential from the prevailing share price.

Sodexo's North American healthcare and seniors, and education divisions, the sources of the 2018 profit warning, saw further improvements in the first half, with organic revenue growth rising more than 1% for both divisions. This was driven by a resumption in sales growth, following management restructuring and importing sales processes from other areas in the group. Elsewhere, benefits and rewards services, best known for its restaurant vouchers division, saw a rise in top-line growth in the first half, with organic revenue growth rising to just over 10% as economic conditions, particularly in Latin America, improved slightly.

Over the long term, we believe the fragmented nature of the food services industry offers large players such as Sodexo and rival Compass Group a significant opportunity to increase their market shares at the expense of local/regional players. This is particularly true for international clients who prefer an increased level of control and ease when dealing with one main food services provider.