EUR 850.00 For Business Accounts Only

Morningstar | SW Updated Forecasts and Estimates from 17 Sep 2018

Narrow-moat Sodexo produced third-quarter revenue in line with our estimates and with the recently downgraded full-year guidance. Currency headwinds played a large part in the numbers with a 7.5% negative impact, thanks to a weak U.S. dollar and real in particular, meaning headline revenue actually fell 2.9% in the period. Organic growth was better at 1.6%, supplemented by the integration and contribution from recent sports and leisure acquisition Centerplate. This update threw up no real surprises, and we do not expect to make any material changes to our full-year forecasts nor to our EUR 110 fair value estimate. Despite the positive share price move after the release, we still see an attractive upside opportunity.

Divisionally it was a tale of two cities, with business and administrations posting solid organic growth of 4.2% over the period while the healthcare and seniors and the education segments remained weak in North America, with declines of 0.8% and 4.9%, respectively. Adjusting for calendar impacts, the result in these two businesses was flat to slightly better than at the first half. For the market, which was clearly focused on this update following the recent profit warning, the lack of further deterioration in the business was enough to improve sentiment toward the stock.

While we too are pleased with some of the positive messages in the third-quarter update, we believe significant work still needs to be done in terms of restructuring the sales efforts in the problematic divisions in the North American business. Sodexo’s recent expansion of the executive committee to include representatives from all businesses should go some way to ameliorating the situation; however, we will be paying close attention over the coming quarters for tangible signs of progress.