CONSUMER CYCLICALS: Edenred; clarification from co on regulatory exposure
(NR/A-)
We have asked the company for details on its regulatory exposure. It has reaffirmed;
- circa 43% of revenue was from regulated meal and food.
- Within major regions: 68% of revenues in Italy, 50% in France and 46% in Brazil are regulated meal & food
- It will NOT disclose the EBITDA exposure to regulation
- It confirms Italy was 18% of group revenues and when combined with above left Italy regulated segment making up 12% of the group.
The latter is where we have issues. The change in fare caps in the country is guided to take 9% off group EBITDA. This is a seemingly outsized impact and though it has said the fares were higher in Italy (to try to dissuade investors from reading through to other regions) it will not disclose the margins by region for us to confirm that.
- We were also interested in why it is guiding to leverage falling further below target (net 1.4x vs. target 2.0x - guidance is for 1.0-1.2x by year-end).
- It says no major acquisitions expected in 2025 given several done in 2023-24 that need time to be integrated.
- Reminder between 2023-24, 85% of the M&A onboarded revenue was unregulated - which is why we have a interest in the pace of M&A.
- Our concern is FCF is instead directed to equity payouts, exacerbated by the stock sitting at 5yr lows. €660m of €880m in FY24 FCF was sent their way.
Unfortunately above does not change our view on a regulatory discount needing to be priced. We set FV with that in mind 2 weeks ago - the 5.5y priced -5 through but is +4 since. Curve looks fair here and given rating headroom may be of interest for investors to eye alongside BBB names (like Rentokil and Securitas).
Re. near term catalyst 1H is guided to be more lacklustre than 2H, FY revenue guided to be up HSD, EBITDA 10%+. Some will question that after a noticeable slowdown in Europe for 4Q - it is pointing to one-offs and offset from LATAM (that is still strong) for the guidance. On regulation, updates are unpredictable on timing.