Sodexo Earnings: Full-Year Results Confirm Strong Momentum Still With the Business

Narrow-moat Sodexo SW finished out the fiscal year strongly, delivering organic revenue growth of close to 12%, with operating margins now back above prepandemic levels. The most interesting part of the release was the outlook—management is expecting 6%-8% organic revenue growth over the next two years, a huge uplift from prepandemic levels. Additionally, management has guided to between 30 and 40 basis points in operating margin improvement per year. We reiterate our EUR 118 fair value estimate and believe the shares offer plenty of upside potential from here.

With revenue in the business and administrations division running above prepandemic levels, the recovery here is complete. The question on investors’ minds now is how long the momentum can continue for, and whether management can deliver on the promises of increased operating margin expansion and structurally higher revenue growth. Our thesis, underpinning our above-consensus fair value estimate, has been that much of the gap in performance between Sodexo, and the world’s No. 1 caterer Compass Group, can be bridged.

Our take is that the pandemic effectively reset Sodexo’s cost base, and supercharged top-line growth and client retention, with the latter running at 95% now. While we could not have predicted the pandemic, we believe these effects are now what will help push Sodexo shares closer to our fair value estimate.