Tuesday 20 March 2018

Share watch: Outsourcing firm ready to face up to the critics

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John Lynch

Outsourcing, that highly controversial phenomenon of the 21st century, in which otherwise unassailable jobs have been sacrificed on the altar of 'efficiency' and lower costs, continues to make the news in senior management circles. Managers stress the need to concentrate on the 'core' business and outsource non-core, while the trade unions continue to believe it is the devil's own invention, aimed only at depressing the wages of the workforce.

So it was a surprise to me and lots of others when I read recently that Debbie White, the head of the UK division of the arch-outsourcers, the Paris-based Sodexo, was calling for an inspector of ethics and transparency to regulate public-private outsourcing. Ms White declared that Sodexo was committing itself to a public service pledge that would commit her company to independent client satisfaction reviews, unannounced audits and full transparency with its revenues. UK mandarins were lukewarm to the idea.

It will be interesting to see how effective this pledge is because Sodexo plays a decent part in the British criminal justice system. It runs both the UK's prison and probation systems. More importantly, Sodexo has been at the centre of many rows, boycotts and strikes in various countries, so a lot of parties will be interested in seeing the company face up to its critics.

Either way, Sodexo is a fascinating company. It is one of the biggest outsourcing companies in the world. Probably best known as the provider of hospitality services at major events like Royal Ascot and the British Open Golf Championship, it has a much broader remit, however. It offers over 100 different services from facility management, receptionist, correction facilities, childcare, concierge services and is the second largest global catering services company. Following its flotation in 1983 the company expanded organically not only in Europe but to Japan, South Africa and Russia. In recent years it has also developed its presence in emerging markets, which now accounts for 20pc of total revenues - up from 10pc in the last 10 years. However, business in these markets recently has been a drag on profits.

Today, Sodexo operates in over 80 countries with 33,000 sites, employs a huge 430,000 people worldwide, serving a staggering 75 million customers per day. It also has an operation in Ireland with contracts mainly corporate, like An Post, Bord Bia and eBay; employing 2,000 people. The company's primary business is onsite services, which account for 96pc of global revenue. Corporate clients account for one-third of Sodexo's group revenue, followed by services in the education sector, with 20pc and 18pc accounted for by healthcare activities. Geographically, the US and Europe contribute over 70pc of total revenue.

During the financial crisis Sodexo shares were in the doldrums but in the last five years its trajectory has been upwards, peaking early this year at €95 per share. Currently the price is in the low €70s giving it a market value of €11.6bn. Its rise in revenue has also been impressive, moving from €15bn five years ago to €18.4bn today with operating profits close to €1bn. Results for the nine months of fiscal 2015 are encouraging, with revenues exceeding €15bn driven by North American sales. Investors are pleased by the company's statement that in future it will confine itself to 'bolt-on' acquisitions, and that it intends exiting unprofitable contracts and will be more selective with new ones. The company is well-placed for growth but given its global nature it is sensitive to currency swings. Sodexo is a solid company and worth investing in, but with the present nervousness in the market, now may not be the time to take a flutter. The ownership of the shares in the company is interesting. The founding Ballon family controls 50pc of the voting rights. Recently the chairman announced an agreement among the family ensuring Sodexo's independence for the next 50 years. Not many companies are so lucky.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned

Irish Independent

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