Introduction:
Edenred is a pure play service voucher and card provider, primarily for the distribution of food and the provision of lunch meals for workforces.
Edenred currently operates mainly in Europe and Latin America. Recently the company has expanded into child care vouchers and store gift vouchers.
The company business model relies on the long-term secular growth trend of emerging market wage growth, favorable demographic trends, and the formalization of emerging market economies. Its business is mostly driven through organic growth and it regularly achieves double-digit overall sales growth figures.
The company’s sales growth drivers are comprised of the following pillars: 1. Focus on the introduction of new products. This pillar achieves about 2 to 4% of sales growth annually.2. Increasing program face value. In Brazil, this figure was over 7% in 2011, and for the timeframe 2013 – 2020 the annual growth rate is expected to be around 8%. 3. Formal employment growth. On average, the target market has increased by 4.6% since 2001, and this trend is expected to continue at the same pace until 2020.4. New contracts. Edenred’s overall market penetration in LATAM is still very low; it currently has a market share of 26%. However, it has grown by about 6.2% annually in this market, and it’s to be expected that it can grow its business in the same manner in the foreseeable future.
Strengths and weaknesses analysis / Fundamental analysis:
Strengths:
- Edenred offers a high return on capital invested and generates significant cash-flows,
- The present valuation remains attractive in the context of high growth,
- Business in LATAM represents about 53% of the company’s sales volume, and trends in the region are positive and the company is expected to exploit them accordingly,
- The long-term secular trend of EM labor formalization is a key driver,
Weaknesses:
- Edenred is exposed to foreign currency exchange risks,
- To justify the present valuation, the company needs to grow constantly at the same rate, which at some point will not be possible,
- European sales were impacted by a decrease in working days; given the economic downturn, no improvement in these key figures is visible in the near future,
- Part of the vouchers are sold with tax benefits for companies. Given the government budget constraints, benefits can be reduced at any time eventually resulting in a loss of business for Edenred.