Type of ratings: Corporate
Rating value: EF1
License: EthiFinance Ratings
Type of ratings: Corporate
Rating value: EF1
License: EthiFinance Ratings
Founded in 1966, Sodexo is a France-based provider of food services and facility management services to various end-markets (education, corporate services, healthcare, sports & leisure). The group is one of the leading global companies in its sector and is relatively well-diversified in terms of geographic mix, with an operating presence across 53 countries as of the end of August 2022 (down from 55 in February 2022 due to divestments of non-core activities).
Sodexo’s revenues for FY22 were €21.1bn (up by 21% compared to last year) along with adjusted EBITDA of €1.5bn, equivalent to a margin of 7.2%. At end-August 2022, our net adjusted leverage ratio stood at 2.3x, to be compared with 3.7x last year.
INDUSTRY RISK ASSESSMENT
Through 2021 and 2022 catering activities have recovered well from the impacts of the Covid-19 pandemic due to the gradual reopening of collective catering. In this regard, Sodexo’s on-site services reached 99% of its pre-crisis level during the fourth quarter of Sodexo's FY22, versus 87% one year ago.
This industry is in a state of constant renewal in order to meet the changing expectations of customers, with more digitalized interactions. We believe that given its comfortable positioning within the sector, with very good client retention, and its satisfactory financial capacity, allowing for M&A, Sodexo is well placed to take advantage of growth opportunities in the sector.
Although we consider that niche brands can emerge quickly in the market, becoming a leading company is way more difficult given, among other requirements, the multitude of long-term partnerships needed to develop global brands & the efficient supply chain and operations which need to be built in order to be profitable. Consequently, we consider that barriers to entry are rather significant.
The majority of Sodexo’s activities and its suppliers have exposure to food commodity price increases (such as grain or meat). However, a large portion of Sodexo’s activities are based on contracts that are inflation-indexed. As a result, Sodexo can pass inflation through to clients, which is driving the growth of revenues while maintaining profitability.
COMPANY’S COMPETITIVE POSITIONING
In a highly competitive market - due to a high number of players – we see Sodexo’s large scale and global presence as strong competitive advantages compared to local, smaller rivals, enabling it to offer integrated services in many countries. These advantages provide Sodexo with more pricing power compared to others in the sector, and also increases the likelihood of client retention. Furthermore, we value Sodexo’s exposure to non-cyclical sub-sectors such as healthcare, education or seniors care (representing together a significant portion of group sales), which provides good protection against the troughs of economic cycles.
Sodexo’s rating is supported by decent geographical diversification with a strong presence across Europe and the Americas. These regions provide the bulk of Sodexo’s revenues (38% and 44% respectively for FY22).
This ESG assessment is based on the FY21 report given that the latest annual report was not yet available at the time of publication of this rating report. We value the decreasing trend in gas emissions per €m of revenues (5.72tCo2 in FY21 versus 6.29tCo2 in FY20). This reduction is in line with Sodexo’s objective of reducing its carbon emissions by 34% by 2025 (compared to 2017). Since almost half of its carbon emissions are linked to its supply chain, Sodexo is committed to promote sustainable and local agriculture. Also, Sodexo is increasing the share of plants-based proteins since they have a better carbon balance than other protein sources. According to the company, Sodexo has already reduced its Scope 1 & 2 carbon emissions by 37.2% and those of its Scope 3 supply chain by 23.2% in absolute terms. Sodexo’s progression towards its goals is expected to benefit its clients and partners, who rely on its experience to achieve their own sustainability goals.
Sodexo is listed on Euronext Paris with a market capitalization of €13.3bn as of October 26th 2022. It is controlled by the family-owned holding company Bellon SA (42.8% of Sodexo shares and 57.4% of the voting rights as of end-February 2022). As of August 2022, most of the rest of the capital was held by institutional investors (50.2%) and the remainder (7%) by employees (1.6%), autocontrolled (0.8%), and individual investors (4.6%).
Since September 2021, Sophie Bellon has been the CEO of Sodexo in addition to her functions as chair of the board since 2016. However, this combination of roles is somewhat mitigated by the good track record of Sophie Bellon, notably her management of the company through the Covid-19 pandemic.
In addition, we view Sodexo’s financial policy as rather conservative. Indeed, we view the dividend policy - which aims to distribute 50% of the underlying net profit - as reasonable given the recurrent nature of the company’s revenues and the low CapEx requirements (2% of its sales historically).
CASH-FLOW AND LEVERAGE
Sodexo’s revenues for FY22 were €21.1bn, up by 21% (versus €17.4bn for FY21). Each business unit registered revenues growth for FY22 (to end-August 2022). Revenue growth in the period was strongest for the two divisions which were particularly impacted by the Covid-19 pandemic, namely Business & Administration, and Education, respectively at 26% and 20%. At end-August 2022, Sodexo’s net adjusted leverage ratio (EthiFinance Ratings’ net adjusted debt/EBITDA) stood at 2.3x, compared to 3.7x the previous year. The higher net adjusted leverage ratio from the previous year was due to relatively weak EthiFinance Ratings-adjusted EBITDA generated during the period (€957m versus €1.5bn for FY22). The current net adjusted leverage ratio at 2.3x is still slightly above the historical norm, of between 1.8x and 2.1x.
Despite the current uncertainties (the war between Ukraine and Russia, high inflation), Sodexo has guided for FY23 organic growth in the range 8-10%, on the back of further price increases of between 4 and 5%, and Underlying Operating Profit (UOP) margin close to 5.5% at constant rates.
Operational cash generation was strong for FY22 with FFO amounting to €1.2bn versus €753m the previous year.
Our FY22 adjusted FCF (after leases repayments and dividends) amounted to €165m. The negative impact of the change in working capital requirements (WCR) of €208m weighed on cash generation. This was mainly due to the recovery of some of Sodexo’s businesses, the payment of Covid-linked deferred amounts owed to the government and large increases in financial assets relating to the group’s Benefits & Rewards Services (BRS), stemming from large increases in Voucher liabilities. All in all, the WCR increased our adjusted leverage ratio by c. 0.1x at end-August 2022.
Over FY23 and FY24, we expect Sodexo to deliver positive free cash-flow after dividends, despite an expected increase in annual dividend, on the back of improved underlying net profit. We expect dividends to reach pre-Covid levels for FY23.
As of end-August 2022, the group reported gross financial debt of €5.7bn, and €1.2bn net of operating cash, both figures excluding operating leases related to IFRS 16. Including IFRS 16 (€943m in August 2022), pensions (€282m), and the reintegration of a portion of the restricted cash linked to the BRS activity (€960m), we calculate a net adjusted debt of €3.4bn. Debt is almost exclusively composed of bonds with maturities ranging from January 2024 to April 2031.
In addition to the existing bonds, Sodexo has access to multicurrency credit facilities for a total of €1.8bn, which were all undrawn at end-August 2022. The main maturity of these facilities amounting to €1.4bn at end-August 2022, (of which $785m is libelled in US dollar) will occur only in July 2026. Finally, Sodexo has two commercial paper programs (NEU CP), each amounting to €1.75bn, none of which was used over FY22. Note that the issuing companies are Sodexo SA and Sodexo Finance DAC. However, the NEU CP instrument of Sodexo Finance DAC benefits from the independent, autonomous irrevocable and unconditional guarantee of the parent company (Sodexo SA), which runs until February 28th, 2025.
We assess the liquidity profile of Sodexo as “Superior”, which is the best category according to our methodology. This reflects Sodexo's strong refinancing profile and very strong liquidity, more than enough to cover debt maturities for more than two years.
We assess the CMEE to be Positive, as we expect continued improvement in Sodexo’s credit metrics over the next 12 months due to buoyant market conditions and further recovery in Corporate Services and Sports & Leisure sectors.
FY22 have been presented in October 2022. However, audited financial statement are not yet available.
An upgrade to EF1+ is rather improbable at present. It would require a material improvement of the group’s financial metrics, in particular a net adjusted leverage below 1.0x on a sustainable basis.
A downgrade to EF2 could be considered if the net adjusted leverage ratio remains significantly high on a sustainable basis, which could result from debt-funded acquisitions, which would also impact our assessment of the group's financial policy.
Initiation report of the NEU CP instrument public rating
Rating initiation: 02 December 2022 at EF1 for the existing NEU CP instrument
Last rating action: N/A
Rating nature: Solicited NEU CP instrument public rating
With rated entity or related third party participation: Yes
With access to internal documents: No
With access to management: Yes
Ancillary services provided to the rated entity: Yes, EthiFinance Ratings provides ancillary services to subsidiaries within the group.
EthiFinance Ratings also provides solicited public ratings to Bellon, the main owner of Sodexo.
This report was published having been reviewed by the issuer.
Name of the rating committee chair: Marc Pierron, Senior Credit Analyst.
Material sources used to support the rating decision:
Limitation of the Rating action:
EthiFinance Ratings believes the quality and quantity of information available on the rated entity is sufficient to provide a rating.
EthiFinance Ratings has no obligation to audit or verify the accuracy of data provided.
Principal methodology used in this research available at:
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Rating action: New
Action date: 2022-12-02
Date last rating: 2022-12-02
Date first rating: 2022-12-02