Expanding Into Underpenetrated SME Markets Will Unlock Significant Opportunities

Key Takeaways

• Expansion into underpenetrated markets and strategic acquisitions are driving growth, with significant room for increased sales and market share expansion.
  
• Advanced pricing strategies and upselling efforts are poised to enhance revenue growth and operational efficiency, optimizing customer lifetime value and margin expansion.
  
• Economic challenges in Europe and Latin America, regulatory changes, and portfolio adjustments potentially threaten Edenred's revenue growth, profitability, and margins.

Catalysts

Provides digital platform for services and payments for companies, employees, and merchants worldwide.

• Edenred's expansion into largely underpenetrated markets and efforts to accelerate client acquisition are expected to drive significant growth in operating revenue. With 80% of their operating revenue generated in countries where SME penetration is below 10%, there is substantial room for increased sales and market share expansion.
  
• The company is focused on increasing upselling and cross-selling opportunities with existing clients. Currently, Edenred sells an average of 1.5 digital solutions per client, with potential to increase this significantly, which can enhance revenue while optimizing customer lifetime value.
  
• Implementation of advanced pricing strategies using AI technology to better segment the customer base is anticipated to lead to revenue growth and improved net margins. This initiative is only at 5% execution, suggesting considerable potential for future financial scalability.
  
• Strategic acquisitions, including Reward Gateway and Spirii, are expected to expand Edenred’s addressable market and integrate revenue streams that will grow faster than the current business. These acquisitions contribute to both top-line and EBITDA growth, aligning with Edenred’s diversification strategy.
  
• The company is executing a ‘Fit for Growth’ plan to improve operational efficiency, likely leading to higher operating margins. This initiative involves optimizing cost management, shared business services, and leveraging synergies from prior acquisitions, which is expected to contribute to margin expansion and enhanced earnings performance.

Edenred Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Edenred's revenue will grow by 10.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.4% today to 20.2% in 3 years time.
• Analysts expect earnings to reach €703.5 million (and earnings per share of €2.86) by about April 2028, up from €507.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.4x on those 2028 earnings, up from 14.7x today. This future PE is lower than the current PE for the GB Diversified Financial industry at 20.7x.
• Analysts expect the number of shares outstanding to decline by 2.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.87%, as per the Simply Wall St company report.

Edenred Future Earnings Per Share Growth

Risks

• The uncertain European economic conditions pose a risk, potentially impacting operating revenue growth, which could result in slower revenue increases and reduced profitability.
  
• Brazil and Mexico’s historically low currency values at the end of 2024 led to negative foreign exchange effects, which might continue to impact net debt adversely affecting earnings.
  
• Regulatory changes in Italy are expected to result in a €60 million decrease in EBITDA, directly affecting margins and profits in 2025.
  
• Hyperinflation and currency devaluation in Argentina will have a small but negative impact on operating revenue growth, showing the vulnerability to external macroeconomic factors which could dampen earnings.
  
• The decision to discontinue less profitable ventures and review banking as a service activities might lead to short-term revenue losses, exposing execution risks in reshaping its business portfolio that could affect net margins.

Valuation

• The analysts have a consensus price target of €43.644 for Edenred based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €55.0, and the most bearish reporting a price target of just €29.8.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €3.5 billion, earnings will come to €703.5 million, and it would be trading on a PE ratio of 17.4x, assuming you use a discount rate of 7.9%.
• Given the current share price of €31.13, the analyst price target of €43.64 is 28.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.