Sodexo (SWFP; Baa1 Neg, BBB+ S, BBB+ S) {SW FP Equity} 1H Results (ending February)

Note Pluxee (PLXFP; NR, BBB+; S) {PLX FP Equity}, the meal-voucher business (was 27% of operating profit & higher margin) was spun-off earlier this year.

Cash lines are selling-off 26/27s +5/6. Earnings today isn't of concern for us - outside some accounting quirks - but how tight curve has been trading in secondary is. CSPP contributing but trading through higher-rated Adidas (another tight curve on CSPP) is of awe to us. 28's at Z+30 is 50bps inside spun-off & equal rated Pluxee 28s.

• Beat on headline with organic revenue growth of 8.5% (c7.7%) to €12.1b, underlying operating margin a tad weak at 5.1%. EBITDA a firm €810m which was offset by net debt increase of €434m to €3.4b on seasonal negative FCF. Left leverage up 0.1x over half at 2.3x - yoy its down from 3.2x. It targets 1-2x over medium-term.
• Capex looks tad higher at €246m (2% of sales) but it is revising reporting definitions so it no longer includes client investment amortisation. Its guiding to rising Capex though - 2.5% next year. Capex combined with NWC of -€513m (1H seasonally tends to be around here) went through €739m in operating cash flows & left FCF at -€102b (up from -€236m last year).
• BS impact was worse on -€456m in dividends (pays in 1H only generally) - highest payout in recent years. We don't see issues on liquidity with cash of €1.45b.
• Guidance; organic growth "at top of the +6-8% range" & operating margin improvement of +30-40bps - we already see consensus here at 7.5% growth but operating margin does look tad weak vs. guidance. Analyst looking for recovery in 2H to give €700m in FCF this year - nothing exciting given dividend pay-out of €450m but leverage should stay in low 2x's on expected stronger 2H (vs. 2H23).
• We expect Moody's to stay on negative outlook for now, risk is a one-notch downgrade.

Earnings call ongoing