EUR 850.00 For Business Accounts Only

Morningstar | Sodexo Shows Improvements but Not Out of the Woods Yet

Catering giant Sodexo served up full-year results broadly in line with our expectations following the profit warning and lowered guidance issued earlier in the year. Organic revenue growth came in at 2%, while underlying operating margins fell 100 basis points year over. Investors should take some comfort from these results, and while the company is not yet fully back on track following the issues that arose earlier in the year, there were certainly green shoots of progress visible in the numbers. We maintain our EUR 110 fair value estimate and reiterate our narrow moat rating. Despite some recovery in the share price, we still see an attractive upside opportunity.

The business areas that caused the profit warning earlier this year, North American healthcare and seniors and education, were obviously the key focus in this update. In healthcare and seniors, underlying organic growth was slightly negative, down 0.5%; however, positive commentary around an improved performance in the second half and the impact of a reorganised salesforce on winning new contracts gives us cause for optimism. In education, organic revenue declined almost 4% year over year with the underlying cause being the university business. Again, we take some comfort from the statement that retention rates are strengthening; however, a lack of new business growth over the period is an indication that the turnaround here will continue into 2019.

Longer 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 share at the expense of local/regional players. This is particularly true with international clients that prefer the increased level of control and ease in dealing with one main food services provider.