(News Bulletin 247) – The bank switched to purchasing the former CAC 40 resident this Monday. Although its British competitor Compass should do even better, she sees the group accelerating its growth while its valuation remains attractive.

In a difficult market context, with the SBF 120 losing 0.5% around 2:30 p.m., Sodexo stands out a little. The stock increased by 1% to 96.44 euros, benefiting from an increase in Jefferies which went from “hold” to “buy” on the value.

Its price target has been raised to 120 euros compared to 96 euros previously, giving the stock a potential of around 25%.

In fact, it is for the entire world of collective catering that the bank is more positive. It also raised its purchase recommendation and its price target on the British Compass, the eternal great rival of Sodexo to which it is always compared, which advances by 1.9% in London.

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Outsourcing that accelerates

In its sector note, Jefferies notes that the share of catering services (collective catering and associated services) provided internally (and therefore not entrusted to sector specialists like Sodexo and Compass) is declining sharply. This trend already existed before the pandemic, but the health crisis has accelerated the dynamic of outsourcing these services, with Jefferies judging that it has “doubled” since Covid.

“Compass, Sodexo and Aramark (an American comparable, Editor’s note) have all reported substantial improvements in their net turnover over the last two years, thanks to the obtaining of new contracts and calls for tenders records, even if they have not been disclosed. Evidence of an initial outsourcing has accumulated,” Jefferies develops.

“This contributed to 42-48% of net new contracts from Compass, Sodexo and Aramark in the financial year (ending in) 2022, compared to a third historically,” the bank continues. The global market share of these three players increased from 19% in 2019 to 21% in 2023, according to its estimates.

Jefferies believes that these contract gains could remain high for a decade, in particular because potential clients of Sodexo or Compass have different reasons for resorting to outsourcing. These clients can see their costs reduced by 15% to 20%, savings which they can then keep or use to improve the retention of their workforce, refocus on their core activities, benefit from the expertise of specialists. linked to food inflation, supply problems, health protocols, labor recruitment or even improving the experience of their employees, via this same expertise, lists Jefferies.

An attractive valuation

Furthermore, operating margins in the sector could return to their pre-crisis records, the bank suggests. Although inflation in food and beverage costs is fading, inflation in wages remains significant. But their good capacity to pass on inflation as well as certain favorable elements, such as the increased use of technology and more flexible labor contracts (and a more favorable customer relationship) should allow them to improve their profitability, Judge Jefferies.

As a result and in view of these promising prospects in the outsourcing of catering services, Jefferies sees Sodexo’s growth accelerating. The bank anticipates a like-for-like increase in revenues of 6% to 7% over the next two financial years, those ending in August 2025 and August 2026, which would allow the company to post a turnover 30% higher than that before the pandemic. “This is a considerable improvement from the 2-3% trend rate recorded during the previous cycle,” notes Jefferies.

This even if in its projections, Compass would do even better, with growth expected between 8% and 9% over the same two financial years. Furthermore, the company’s valuation appears attractive, with the stock trading at 14 times expected earnings in 2024, at the lower end of its average range of 12 to 22 times during the economic cycle.

Remember that Sodexo was shaken last week (a decline of 3.3% the same day) after the Minister Delegate Olivia Grégoire threatened to establish a cap on the commissions received by issuers of meal vouchers at the restaurant level. . This activity weighs relatively little in Sodexo’s accounts, with “benefits and rewards” (restaurant vouchers, gifts) representing only 4% of revenues for the 2021-2022 financial year, but it has a greater weight in terms of profitability since it accounts for 23.4% of operating income.

“If the reimbursement commission rate was adjusted from 3-5% to around 3% (lower end of the range), the risk would be less than 1.5-2% of EBIT (operating profit) for Edenred and around 1 .5% for Sodexo”, Deutsche Bank recently calculated.

This uncertainty comes as Sodexo plans to split up and list this “employee benefits” activity on the stock market under the name “Pluxee” next year. The company’s management certainly has in mind the great stock market success of Edenred, leader in the sector, which recently joined the CAC 40.