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A cocktail of catalysts

  • 18 Feb 16

We initiate coverage on Elior (€2.8bn market capitalisation) with a BUY recommendation. The stock stands out in the Catering and Concession markets given its niche position and its best-in-class track-record in terms of operating margins compared to peers. Also, we give a premium on the management and the CEO in particular, whose strategy looks clear and relevant. *Our recommendation reflects the following drivers:* *1)* Big contracts won in 2015: +In France:+ * €700m of sales over 10 years won with the SNCF (c.10% growth is coming starting in FY17, fully enforced in FY18). In France (concession), Elior has renegotiated contracts and extended maturity (until 2023 and 2024) of the existing portfolio in railway stations. So the portfolio for the next 10 years in the French railway stations is secured. * A new organisation and management have been put in place over the past three years (including a new CEO and CFO, a new purchasing director from February 2016, a new COO of B&I, a new COO of Healthcare…). The marketing and purchasing functions have been paired together. * Strong trading in October and November 2015 to favour the signing of new contracts. * Strong position in the B&I segment. +In the US:+ from 2017, a $250m contract (over 10 years, $25m p.a.) won with Gares -> the objective in the US (c.10% of FY15 Concession Catering sales) is to reach $400m of sales by 2020, mainly by organic growth (gain of new contracts, target of c.5% growth LFL p.a.). *2)* 2016 will not fully reflect the strategic moves endorsed in 2015 which was a year of transformation, including: +The cleaning-up of the contract portfolio:+ the contract exits in FY15 will impact FY16 sales by €80m. +Acquisitions:+ * Minorities in Areas. * Acquisition of the US companies STARR, ABL and Cura with expected incremental sales in FY16 of c.$130-135m. * Debt refinancing in H1 15 -> extended maturity (the next one: €900m falls in 2019) and lowered financial costs (financial interest slipped by 20% in FY15). * New organisation and management (incl. new CEO in France). These strategic actions will be enforced and should start to yield benefits from 2017. This is reflected in the moderate improvement of the operating leverage in FY16 compared to Elior’s mid-term objectives (EBITDA margin to improve by 160bp to 10% by 2020). But Elior expects the EBITDA margin to reach 9% in 2017 while it will be pushing the profitability for the contracts. In France, in particular, the Education and Healthcare sectors provide growth potential in terms of operating margins. In these segments, Elior has been a challenger (particularly in Healthcare) and has been lagging B&I’s profitability (where Elior benefits from a better position). The new team put in place in France should help to turnaround these segments. *Main points of caution:* *1* France (50% of FY15 sales) has been recording the highest EBITDA margin level (in both Catering and Concession divisions, see chart below). But the outlook in the French concessions could be hampered by the fallout from the terrorist attacks in Paris (November 2015) on traffic in airports, motorways and railway stations. Elior also lost a concession contract with OIC (c.€15-20m impact on sales in FY16 with further €15-20m in FY17). In Contract Catering, Q4 15 sales were only up 0.9% lfl compared to c.5% in the UK and 2.4% for the division given the weak macro environment. p=. !Latest.png! *2)* Italian comps will be tough in FY16 for the Concession division (the Milan Expo fetched in c.€5m of sales) but the country continues to increase in terms of trading and the airport business has proved quite strong and healthy. *3)* While M&A stands as one of Elior’s catalysts, we have no visibility yet as regards to the agenda over the next five years in terms of the timing or size of amounts to be spent. Also, transaction multiples could also rise in the coming years. M&A operations also often bear execution risks with potential costs related to the integration of the new business while we can also expect some delays in seeing synergies materialise.