The French facilities company that's catering to an uncertain future

Chad Padowitz

Talaria Asset Management

In our September quarter’s Investment Insights section, we deconstructed the total return of the S&P500 Index into its fundamental building blocks and highlighted that significant risks to future returns lie ahead.

For our stock in focus we apply the same framework in our bottom-up work and aim to discover opportunities where the opposite is true. Sodexo neatly fits the bill.

Business Overview

French-based Sodexo is the world’s second largest catering and facilities management provider servicing a broad cross-section of industries. In addition to these on-site services, Sodexo also operates one of the most popular global voucher businesses, accounting for ~20% of pre-COVID earnings. Employers can use vouchers as incentives or gifts for their employees. On a group-wide basis, Sodexo employs 412,000 employees across 52 countries, generating annual revenues of more than €20bn.

Sodexo has delivered a solid 8.8% compound annual growth for over a decade

A total shareholder return of 8.8% per annum since the GFC is solid but not spectacular when compared to rates several points ahead of this for the S&P500 and other global indices. Dig deeper, however, and the quality of returns starts to stack up more favourably. Roughly a third of total shareholder returns came from income (dividends and share buy-backs) compared with just 15% for the S&P500. Another 30% came from sales growth while P/E expansion and margin improvement, volatile and mean-reverting components, contributed just over a third versus more than 60% for the S&P500.

History does not provide a reliable guide to the future, but it helps frame a starting point for our assessment of what is probable.

Source: Bloomberg, Talaria Estimates

Positive skew

Revenue growth

Sodexo operates in a growing industry with momentum underpinned by the ongoing outsourcing of catering and facilities management services. They have delivered a very steady organic growth rate that has averaged 3% per annum over the past 15 years. Other than the pandemic years, the company has never had a negative organic growth year. But with COVID largely behind us, as of Q3 FY22 revenues for Sodexo are now running at ~97% of FY19 levels.

In a more “normal” recession the business model offers defensive characteristics courtesy of its staple-like product offering and the fact that most customers are secured into long-term contracts (the company kept growth steady during the GFC). On this basis, our forecast revenue growth of ~3% pa over the coming years embedded within our valuation, seems realistic.

Source: Talaria estimates, company accounts


Global catering is a very low margin and high asset turnover business. Despite low single digit margins the industry consistently delivers 20%+ ROIC. Sodexo has delivered an average net margin of 3% since 2006. Management has guided in the latest results release that margin expansion will continue trending upwards supported by inflation-linked contracts that provide a benefit to the bottom line with a lagged effect. We expect margins to recover towards 3.8% in our base case. Our stress case assumes the margin reverts to the long-term average of 3%.


Sodexo shares have traded consistently on a mid to high teens P/E ratio since 2005. The average is 18.6x and shares are currently trading on 17.5x. In our base case we assume no change to the P/E ratio, which we consider reasonable as it remains near the historic average. In a stress case we assume the company derates to 14x P/E, consistent with the GFC low.

Cash Flows and Capital Management

Excluding COVID years, Sodexo has had an excellent track record of generating Free Cash Flow (FCF). Additionally, Sodexo management have done well prioritising shareholder returns over the years. Consider that from 2010 to 2019, Sodexo generated cumulative FCF of €~6.5bn, of which more than 60% was returned to shareholders via buybacks and dividends. Also unlike other listed-catering peers, Sodexo did not go cup-in-hand to shareholders in the depths of COVID, managing to avoid what would have been a highly dilutive equity raise. Instead, management took the opportunity to restructure borrowings such that Sodexo now has a covenant-free balance sheet. Hence, Sodexo has already resumed paying dividends with the potential for more buybacks in coming years as leverage metrics continue improving.

A bridge to the future

Bringing it all together we present two scenarios for future returns over the next decade (see table).

Under our realistic case, dividend and buybacks will contribute to almost half of the ~8% expected compound annual growth rate (CAGR). Sales growth will contribute another third. Slight improvement in margins will round off the remaining quarter. We forecast no benefit from an improved valuation multiple.

In a pessimistic scenario the shares do not meet our 8% target CAGR but still deliver a positive return supported by Sodexo’s strong cash generation profile. Income returned to shareholders of over 4% accounts for the entirety of returns. Sales growth is more than offset by margin contraction towards the long-term mean and valuation falling towards levels last seen during the depths of the GFC.

Note that forecasts regarding future performance contained herein are based on our reasonable views and assumptions. They are not guaranteed to occur.

Put simply, Sodexo can continue delivering solid returns of ~8% to shareholders over the next decade in a consistent manner. Even under a stress scenario total return should remain positive – a gift in the current market environment.

The information in this article is general information only and is not based on the objectives, financial situation or needs of any particular investor. In deciding whether to acquire, hold or dispose of the product you should obtain a copy of the current Product Disclosure Statement (PDS) for the Fund and consider whether the product is appropriate for you. Units in the Talaria Global Equity Fund (Managed Fund) (the Fund) are issued by Australian Unity Funds Management Limited ABN 60 071 497 115, AFS Licence No. 234454. Talaria Asset Management Pty Ltd ABN 67 130 534 342, AFS Licence No, 333732 is the investment manager and distributor of the Fund. References to “we” means Talaria Asset Management Pty Ltd, the investment manager. The information in this document is general information only and is not based on the objectives, financial situation or needs of any particular investor. In deciding whether to acquire, hold or dispose of the product you should obtain a copy of the current Product Disclosure Statement (PDS) and the target market determination for the Fund and consider whether the product is appropriate for you. A copy of the PDS and the target market determination is available at or by calling Australian Unity Wealth Investor Services team on 1300 997 774. Investment decisions should not be made upon the basis of the Fund’s past performance or distribution rate, or any ratings given by a rating agency, since each of these can vary. In addition, ratings need to be understood in the context of the full report issued by the rating agency itself. The information provided in the document is current at the time of publication.

Chad Padowitz
Co-Chief Investment Officer
Talaria Asset Management

Chad is the Co-Chief Investment Officer and co-founder of Talaria Asset Management. He has more than 21 years of experience in the financial services industry in the UK, South Africa and Australia. Talaria's investment strategy seeks to increase...

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