Investment thesis

Over the past few months, shares of French food services company Sodexo (OTCPK:SDXAY) have been hammered as the company lost a significant portion of its revenues due to the virus outbreak earlier this year. With attractive relative valuation and strong historical performance, Sodexo’s recovery is going to be quick and solid.

Corporate profile

Sodexo S.A. is a French food services and facility management company operating worldwide with a presence in 80 countries and a workforce counting over 425,000 employees. Every day, the company serves over 75 million consumers, with approximately a third of them representing corporate clients and about two-fifths of the total consisting of education and healthcare professionals.

Source: Sodexo’s investor presentation

Key insights from the latest quarterly earnings announcement

Looking at headlight figures of Sodexo’s most recent quarterly earnings announcement, year-on-year revenues have declined by more than 30 percent to €3.91 billion. This is a considerable hit which management of the company addressed with the following words:

We have lost nearly one third of our Q3 revenues relative to last year due to COVID-19. Nevertheless, our On-site business broad geographic mix, strong Facilities Management (FM) and large integrated accounts combined with Benefits & Rewards have given us resilience.

At the start of the crisis, our focus was on protecting the health and safety of our people, consumers and clients. With a significant number of sites fully or partially closed, we immediately identified all means to protect our cash and reduce our costs.

As deconfinement became a reality, first in Asia, then in Europe, we launched “rise with Sodexo”, a new program to help our clients reopen their sites safely and as quickly as possible. This multi-service approach brings together a wide range of our services with secure protocols, approved by the Sodexo Medical Advisory Council and carrying a Bureau Veritas hygiene verification label. – Sodexo CEO Denis Machuel

As a recent study indicates that more than half of Brits are keen to return to stadiums and cultural venues as soon as they become available again, Sodexo, with its new programme, seems prepared to provide solutions to help clients reopen safely, efficiently, and successfully.

Financial analysis

From the perspective of financial statements, Sodexo has strong profitability metrics (double-digit ROE) and sustainable level of long-term debt on its balance sheet (long-term debt representing around 45 percent of total capital).

Valuation

Plugging in Sodexo’s financial statement figures into my DCF template, the company’s shares seem to be substantially undervalued. Under the perpetuity growth method with assumptions of a terminal growth rate of 2 percent, 2.6 percent annual revenue growth over the next five years, and fixed operating earnings margin of 5 percent, the model’s estimate of intrinsic value of the stock comes at 244 EUR. Under the EBITDA multiple approach of a discounted cash flow model, the intrinsic value per share value of the company stands roughly at 117 USD if we assume that the appropriate exit EV/EBITDA multiple in five years’ time is around 10x.

Source: Author’s own model

The bottom line

To sum up, Sodexo is an outstanding company with its shares currently trading at very inexpensive levels (Price to Earnings Ratio, 13.58x; Price to Sales Ratio, 0.69x). With signs of share price stabilization and non-cyclical nature of the industry the company operates in, the downside risks of potential investment might be largely limited while the upside potential on economic recovery significant. Lastly, in the current low-interest-rate environment, Sodexo can showcase an exceptional track record of dividend payouts, making it a safe bet in the post-pandemic recovery.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: Please note that this article has an informative purpose, expresses its author’s opinion, and does not constitute investment recommendation or advice. The author does not know individual investor’s circumstances, portfolio constraints, etc. Readers are expected to do their own analysis prior to making any investment decisions.

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