2023-12-14 09:00:00 ET
Summary
- Edenred is a small and undercovered company with a great valuation in the employee benefit/ticket restaurant business.
- The company has shown strong financials and double-digit operating revenue growth across all business lines and geographies.
- Despite some operational-specific risks and geographical split, Edenred has significant upside potential and a fair value target of at least €62.
Dear readers/followers,
It shouldn't be a surprise to you if you follow my work that I like smaller and undercovered companies at a great valuation. I might sometimes go in too early, which means I have to hold onto my investments somewhat longer than I'd like (for the upside), but in the end, I am holding qualitative businesses. Edenred (EDNMF) (EDNMY) is one such business.
I have been covering this company twice so far. If you look at the company's tickers, and the ADR, you'll note that I am the only analyst no Seeking Alpha paying any attention to Edenred - at least enough to cover it.
My last article on the company was published in August - before that it was over a year ago since I bought my first small position. I loaded up quite a bit more during August, and here is where the company has moved in the meantime.
It's not often that I can take a victory lap on a stock like Edenred - so I'm savoring where the company is at this time. At the same time, I do not believe the company to be close to fairly valued yet.
So in this article, I'm updating after the company's 3Q23 and seeing where we might go from here.
Edenred has historically outperformed expectations, with its share price up double digits YTD. Edenred has a stable outlook, and strong financials, and is investing in future growth through acquisitions and digital services.
Here is my update.
Update on quality employee prepaid services - Edenred
Edenred has had a good series of quarters and results in the last few years. This is a great company with a great value proposition, at least how I see it. Why?
This company, previously known as the services segment of giant Accor, is an employee benefit/ticket restaurant business. It's also known as a corporate service provider. It offers corporations prepaid employee benefits that in most geographies come with appealing tax benefits for the company - i.e. they are cheaper for the employer than salary or other benefits, and attractive for the employee because it is cheaper than paying for your meal privately.
It's a very attractive segment to be in, provided that the company can achieve resilience in its business and customer loyalty - and that is what I believe Edenred has been actually able to do at this time. The company is fundamentally safe - it manages A- in terms of credit and has a global presence that at this time, encompasses 45 countries across the globe.
The company manages around €30B of issue volume annually, and almost all of this is transacted through card, phone, or the web. The company's business model combines revenue streams not just from the client fees , meaning the corporations that offer benefits, but from merchants as well.
And business, dear readers, has been good.
In the 3Q23 quarter, the company managed another excellent set of results, with 25% growing revenues YoY, and 23.7% LFL , with an annual revenue that YTD 3Q23 stands at almost €1.8B. (Source: 3Q23 Results )
This means that Edenred is showing double-digit operating revenue growth across all business lines and geography.
Obviously, this is not peanuts.
The company is focusing on the underpenetrated portion of its global markets, trying to capitalize on its offerings. The new era of mobility and transformation makes being competitive in benefits all the more important to companies, and this directly benefits Edenred. Because the company is actually still rather small, this is also to me a very clear growth story. (Source: 3Q23 Results)
The company is further promoting its various products, including food, fuel, and beyond payment. It's also introducing external growth levers through avenues like reward Gateway, GOintegro, and PagBem.
The company is able at this time to give high-conviction guidance for the full year, coming to no less than €1B in annual EBITDA or above, potentially as much as €1.1B. (Source: 3Q23 Results)
The story here is confirmed business momentum and growth. Here is a picture of how the company's various sub-segments have been doing - and you'll see the double-digit growth we spoke of.
Also, the growth geographically has been impressive and goes to show you how much the company can still expand on a global basis.
The company's focus at this time is the growth of its core and scaling up the markets that are currently underpenetrated here. The company has been entering several new markets per year for the past few years - and the company is also a beneficiary of growing legal attractiveness when it comes to the maximum legal face value increases across the world (enhancing the appeal of its services).
The company's reward gateway technology is delivering superb growth across several segments. (Source: 3Q23 Results)
Many of the company's markets and sub-segments remain very underpenetrated overall - such as the German market, which still has significant potential for things like Beyond Food benefits, or the Brazilian market for the Beyond fuel benefit.
Edenred excels at identifying markets across the world where there is a need and a desire for a benefit to be offered and then structuring a solution that companies are open to exploring. The best proof here is the company's impressive growth, with the "other" revenues of the company having more than doubled in less than a year.
As it grows and scales, this improves the offers that Edenred will be able to do for its customers and merchants. Technology is obviously a big beneficiary here as well.
Overall, there are catalysts for potential game-changing developments in the card for Edenred - especially given the solid credit rating of A- and a well-covered dividend, even if that dividend in today's environment might not be the best under the sun.
A quick glance at the balance sheets and liabilities shows us that the company has negative shareholder equity on its books, but this is due to accounting reasons related to the D&A of Accor assets at the 2010 spinoff. The difference between fair/carrying value was charged to equity, and there's still a number of years before this is "solved" - but even with this considered, I see more positives than negatives in this company, and that's why I invest in Edenred.
Risks & upside
The company does possess some operational-specific risks to its business model. The fact is that Edenred is incredibly dependent on regulations in taxes and social security on employee benefits. While I do not see the fundamentals in this sector changing for the deep negative in the near term, or even the long term, it's worth mentioning that these things do change. Sweden and how things have changed here is a good example.
Also, Edenred has a decent amount of geographical split specifically to Brazil and France. 40% of company revenues come from these two nations , and Brazil isn't exactly the most stable of nations in terms of economy or politics. It may also turn some investors off due to FX.
However, the upsides to me win out here, even with these risks considered. Edenred is a fundamentally, well-capitalized attractive player on a market ruled by sales expertise and large client wins, which Edenred has proven it can do over decades of history.
That is why I invest in the company, and why I continue to see a significant, double-digit upside for the company here.
Valuation
The valuation for Edenred at this particular time remains a positive one, meaning that I do not see that the company has yet fully recovered from what I see as a discount.
The company trades under the native ticker EDEN on the French stock market, and it does require you to consider it at a premium. If you believe that the company should trade at P/E 15x due to its low yield, then you'll be waiting a long time. A long, long time.
As in, that has never happened for as long as the company has been publically listed.
Edenred demands you to give it a premium of, I would say, at least 25-26x P/E. Anytime it's below 20x, this company is a significant "BUY" to me. Even at the valuations we see today, because I validate this premium, I do not necessarily see the company as overvalued here.
In fact, if you like me, validate this premium, then your upside to a 27x P/E is still over 21% per year, or a total of 50% in 3 years. If you validate the 5-year premium, it goes above 30% per year.
This is one of the few companies that due to its fundamental strength and its upside, I am willing to give the benefit of a P/E premium. Not all analysts agree with such an approach, but most that cover Edenred do.
Despite what you may view as a significant overvaluation here, we on the analyst side give the company a range of €55/share on the low side to €80 on the high side - it currently trades at €53 for the native - with 12 out of 15 analysts at a "BUY" or similar positive outperformance stance for the company.
In my latest article, I made a case for a €62/share price target - and it should not surprise you if familiar with my work, that I keep my share price target steady here and do will not be lowering it - nor will I be raising it.
I will continue my investment into Edenred - not necessarily buying more straight away, but keeping my shares and potentially adding more over time.
Most importantly though, I still consider Edenred to be a solid "BUY" here, if one where you really have to accept the premium for this company.
Thesis
- The current thesis for Edenred continues to be a positive one even in December of 2023. The company is a market leader in employee engagement and rewards, with solid market-leading positions in incumbent and attractive geographies, including Europe and the USA. It's focusing on inorganic expansion, already catering to almost 10M new customers across Australia and South/Latin America with its most recent M&As.
- The current valuation, while not close to as favorable as when I last called for a "BUY" for Edenred, could still make sense to you as a long-term investment with an eye to total return. There is double-digit potential in Edenred - over 21% annually even at 27x.
- I give the company a fair value target of at least €62 for the long term, which still makes it a "BUY" here at this time, with an overall share price of €53.
Remember, I'm all about :
1. Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them (italicized).
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside based on earnings growth or multiple expansion/reversion.
The company has a solid upside, provided you accept that the upside is primarily based on growth, not reversal or undervaluation. I am willing to accept this in a few cases, and this is one of them. I do no longer call the company "cheap" though.
Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
For further details see:
Edenred: I Hope You Bought Before The 20%+ Upside