Description

Introduction:

Pluxee (“the Company”) resembles some of the classic “spin-off” stories that Joel Greenblatt wrote about in You Can Be Stock Market Genius. The Company represents a strong business model that was a small part of a larger, lower-quality enterprise. Although Pluxee never realized its full potential as a segment of a larger company, as a standalone company with large insider ownership, new initiatives should result in a meaningful improvement to the business’ operations. And, most importantly, the lack of price discovery and uneconomic spin-related selling has created the opportunity to get this business at an exceedingly fair price. 

Why The Opportunity Exists:

We believe that there are three reasons that this opportunity exists. The first is that the spinoff created some level of forced selling. Although the controlling shareholder, the Bellon family, cannot sell shares for three years, we suspect retail investors and index-hugging institutional investors have been selling over the last few weeks. Secondly, we believe that management has purposely been conservative in their guidance. In the short-term, roughly ~€45m of compensation is dependent on the share price of Pluxee (a lower Pluxee share price would be advantageous to employees) until February 29, 2024. In the medium term, we believe that management has put out conservative targets to establish credibility and manage expectations. Because of the lack of execution history (namely lagging their direct competitor), most analysts believe that management will perform roughly in line with their guidance. Finally, a scandal at Edenred (Pluxee’s closest comparable) exacerbated the closest peer’s valuation, obscuring some of the undervaluation. We believe that the market’s reaction is overdone and valuations for both companies should converge with their medium-term historical averages. 

Business Overview:

Pluxee’s business model is facilitating tax-exempt benefit payments to employees. In countries around the world, the government has created incentive programs whereby paying your employees in vouchers for certain things (historically food, but this has been expanding to encapsulate things like green mobility) is tax-exempt / tax-advantaged. This system exists because it benefits all parties involved:

1. Governments benefit from incentivizing companies to focus on their employees’ well-being and the knock-on effects of spending at local restaurants and merchants

2. Companies benefit from more cost-effective compensation

3. Employees benefit from greater purchasing power on the benefit-related portion of their salary

To facilitate this transaction, the employer (“client”) pays Pluxee for the month’s benefits at the start of the month. Over the month, employees (“consumers”) spend their benefits at restaurants (“merchants”) that are part of the Pluxee network. After a certain amount of time, Pluxee will then remit the payment to the merchant. As a result of their business model, Pluxee primarily generates three streams of revenue. 

1. The first is derived from charging the affiliated merchants to accept meal vouchers as a form of payment. Depending on this geography, the commission on the merchant side can be between 4% and 7%; this makes up ~2/3 of the overall take rate on a transaction.  

2. The remaining take-rate is for their services on the client side. Due to the greater negotiating power of large clients, issuers like Pluxee have not charged clients a significant amount (typically between 0.5% and 1%). However, with small and medium clients (“SMEs”) the take rate is significantly higher. 

3. Finally, Pluxee generates a significant amount of float. Since it holds the cash for on average 6-7 weeks before remitting to merchants, it can generate interest on that balance. As of last year, that balance was roughly €2.5bn on €22.8bn of total spending by the consumers.

Mispricing Factors:

Misunderstanding the Inflation Effect 

Pluxee is an inflation beneficiary. In times of inflation, governments will increase the acceptable face value of the benefits that employers/employees can receive tax benefits from. These adjustments are intended to keep up with the cost of living. These increases will eventually flow down to consumers, who increase their spending at merchants. Since Pluxee’s revenue model is mostly based on a take-rate, this increase in nominal transaction volume (“business volume”) drives higher revenue. Hence, when in a highly inflationary environment, like the one we have experienced for the last few years, the magnitude of these changes results in high margin growth for issuers. 

However, there is nuance to Pluxee’s business model that we believe is being overlooked. Although the effects of inflation have started to appear in Pluxee’s financials, we believe that it should continue to provide a strong tailwind over the coming years (even if/as central banks successfully bring inflation back to target levels). The reason for this is that there is a sizeable lag between when headline inflation hits and when Pluxee / other issuers realize the full benefit of the inflation. 

The first contributor to this lagging effect is when governments will increase the face value of the benefits relative to inflation occurring. Although in some countries, like France, indexation happens automatically, many countries require an authority/government entity to explicitly increase the face value. Over time, most countries will catch up to inflation, but the pace at which they do it will vary. This discrepancy was most pronounced during COVID, when the speed of inflation rose dramatically over a brief period. Based on our research, the legal cap on face values in 66% of Pluxee’s countries remained unchanged since the end of 2022; we could find only ten countries (which is consistent with management’s commentary in their Investor Day presentation) that had made an adjustment effective starting January 2023. Furthermore, we believe ~25% of countries have not passed increases since the end of 2021. As the remaining countries catch up to the pace of inflation, Pluxee stands to benefit from the high margin increase to their transaction volume. 

The second factor resulting in a lagging effect for inflation is the difference between when face value is adjusted and when clients adjust their benefits. After a given government has increased the legal cap on the face value of the benefits, clients will typically take time to adjust their benefits upwards to reflect the increased tax savings and cost of living adjustments to compensation. Pluxee and other issuers often play a key role in helping educate clients on maximizing the potential of their benefits programs. As evidence of this, we can see how inflation has impacted Edenred’s Employee Benefits segment; here, Edenred management has consistently called out that increases in face value take time to fully be reflected in the Company’s revenue:

“The first thing is 55% did not see any [face value] increase in 2022. So it will come because the pressure due to inflation forces the employer to give more benefits. So we still have 55%, but we're not part of this process of maximum legal face value increase in 2022. The second good news is it takes about 2 years to get 85% of the growth. So it's only the beginning of the process of maximization of the face value increase usage among our portfolio…” – Edenred CEO and Chairman, Bertrand Dumazy, on the 2022 Earnings Call

“But one thing you need to remember when we have an increase in the face value, the benefits of the increase are not immediate. It takes between 1 and 2 years before you have the full potential of the face value increase. And the second thing to remember, it's not because you have a face value increase, but all companies are at the maximum of the legal envelope. So that is a second job that we need to do on a daily basis, whatever the evolution of the sales value is to take some time to convince the employers to use more of the legal envelope.” – Bertrand Dumazy on H1 2017 Earnings Call

During Pluxee’s Investor Day, management also alluded to this source of growth by saying the Company still had a “significant gap to bridge up to the gap… that's why we are so confident in our ability to generate growth, thanks to a fair value increase.” We believe that this source of revenue growth will provide a robust floor for the Company’s performance. We estimate that between the inflation that has yet to be reflected in the legal caps as well as the closing of the gap between allowable face value and utilized face value, business volume should be able to grow at 5-6%; in other words, if the Company does not grow the number of beneficiaries, the existing business volume alone should grow at MSD over the next 2-3 years. 

Underappreciated Potential of Santander Partnership:

We believe that the market is also overlooking the significant potential of Pluxee’s partnership with Santander Bank. In July of last year, Pluxee announced that it had signed a 25-year exclusive distribution partnership with Santander Brazil. This partnership will accelerate Pluxee’s development in Brazil, resulting in a positive inflection in revenue growth and profitability in the Latin America segment. 

To understand why we are so bullish on the partnership, it is important to consider the environment in Brazil. Brazil’s small and medium enterprises (“SMEs”) – defined as companies employing less than 250 people – employ ~60% of the labor force. Despite being such a large employer, only 20% of SMEs in Brazil utilized Meal and Food benefits. This compares to a >50% penetration for all businesses in Brazil. This discrepancy is due to historical challenges with setting up and managing an employee benefits system as well as difficulties with selling to and servicing smaller businesses. However, digitization of the employee benefits solution has solved these two problems. Digital benefits are now significantly easier to set up (through things like self-service customer journeys) and service (automated chats and other digital communications). SME customers are also typically significantly more profitable for issuers. This is because the take rate charged to the client can be higher; without a competitive RFP process that drives down price, issuers typically cite that SME clients can be 30-50% more profitable than their large counterparts. 

Hence, we agree with management that the SME opportunity in Brazil is extremely exciting. We also believe that the Santander partnership is a meaningful catalyst that will accelerate the rate of penetration in Brazil, bringing outsized growth to the Company. Santander Brazil is one of the leading banks in Brazil and has ~1.4 million serviceable clients. Management indicated that “a high percentage” of these clients are SMEs. Furthermore, Santander has 2,500 sales managers dedicated to said SMEs, with established relationships and trust. By leveraging this existing infrastructure, we believe that Pluxee will be able to grow very rapidly in the lucrative Brazilian SME market. Another piece of evidence that this strategy is likely to be successful is that it is a shameless copy of the strategy that Edenred used to accelerate growth in Brazil. We can see the benefit of Edenred’s partnership with Itaú Unibanco (a leading Brazilian bank with a similar customer base) through their management’s consistent positive commentary: 

“So by leveraging our external distribution channel, we are pleased by the ramp-up of our Itaú partnership in Brazil… in H1 2021, the level of new SME contracts that we signed is equal to the level we were signing in 2019. So on SME contract penetration, we are back, and we are back on steady growth. That's for scale… So to make a long story short, very encouraging SME results, very encouraging ramp-up of Itaú partnership.” – H1 2021 Earnings Call

“And then we are leveraging also selective distribution partnerships such as Itaú in Brazil, where we multiplied by 3 the number of contracts signed in Q1 2022 versus 2021.” – Q1 2022 Earnings Call

“The growth stands at 16.8% and is supported by sustained commercial momentum in Employee Benefits Solutions with increasing contribution from Itaú Unibanco partnership...” – Q3 2022 Earnings Call

“Edenred solutions benefit of solid commercial momentum in Employee Benefits Solutions, continued ramp-up of Itaú partnership, contributing to further penetration of the SME segment.” – Q1 2023 Earnings Call

“In Brazil, Edenred growth is double digit in Benefits & Engagement driven by Itaú Unibanco partnership, helping to further penetrate the SME segment in Meal & Food…” – Q3 2023 Earnings Call

We strongly believe that Pluxee and Santander will be able to recreate a similar level of growth in the coming year. Assuming that 40% of Santander’s 1.4m clients are addressable by Pluxee and Pluxee is able to penetrate 3-4% of this addressable client base a year (~20k clients), it should sustain a high teen level of revenue growth in Brazil. 

Overstated Competition Concerns:

One concern that we have come across while researching Pluxee is the risk of new entrants taking market share and disrupting the existing oligopoly that issuers currently enjoy. While at face value it may seem like this is a concern for the long-run profitability of this business, we believe that this risk is overblown under the current market structure. Many who argue that the moat around this business has diminished point to the recent success of Swile in France. However, we believe that this is not the full story. A deeper look reveals that Swile was not as successful in displacing the incumbents as it would initially appear. Importantly, a report put out by the Competitive Authority in France reveals that most of Swile market capture gain came from taking market share from Up, not from displacing Edenred or Pluxee:

“While the market shares of Edenred, Bimpli and Sodexo remained stable … Up Coop lost [ 0-10] market share points over the period mainly to the benefit of Swile.” – Translated passage from Opinion No. 23-A-16 (published Oct. 12, 2023)

For context, Up is a cooperative that was slow-moving in the transition to digital. As a result, it was caught flat-footed as more customers sought digital solutions. Furthermore, formers at Edenred and Pluxee confirm that Swile was hitting the upper limit on the market share it could gain. The limiting factor for Swile was being unable to onboard merchants, especially in critical areas for large clients. This is despite charging significantly less. By merging with an existing large player (essentially buying into the oligopoly) Swile was able to overcome the network effects that prevent new entrants from gaining meaningful share. We believe that as Swile-Bimpli moves more towards profitability – which they hope to achieve in 2024 – they are more likely than not to act rationally instead of pursuing an overly aggressive land-grab strategy. 

Ultimately, we believe that this business has a set of robust moats around it. As displayed in France, the network effects of this business mean new entrants have a hard time coaxing merchants and clients to get on board. On the merchant side, few merchants are willing to accept fees more than Visa and Mastercard without significant ROI; and, without a large network of consumers already in the network, smaller players cannot deliver on the ROI to justify fees close to the incumbents. On the client side, potential customers are particularly sensitive as they are forced to trust issuers with significant amounts of money upfront; hence, there is some element of reputational advantage conferred upon larger players with proven track records. In addition to the network effect and reputation advantage benefitting incumbents, another challenge is that these products are sticky:

“The Authority noted in its decision no. 19-D-25 the meal voucher market is characterized by strong inertia in demand, which is illustrated by the low turnover rate (less than 10 %)172. Between 2018 and 2022, the customer attrition rate of incumbent operators remains relatively low, particularly with regard to lost customers.” – Translated passage from Opinion No. 23-A-16 (published Oct. 12, 2023)

According to formers at Edenred, the churn for existing customers seemed to be around 5%; if a customer had more than one benefit (for example a meal voucher benefit and a green mobility benefit), churn was half of that. This Competition Authority’s report also further verifies this information, stating that most of the growth in customers was largely explained by a “growth in the meal voucher market.” This limited turnover acts as another obstacle that new entrants must overcome in their efforts to gain scale. This multifaceted moat is the reason why even well-capitalized players, like Mercado Libre (Brazil’s Amazon), have failed in their attempts to displace the incumbents. We believe that the strong moat around this business remains intact, protecting returns for the foreseeable future. 

Summary Model and Valuation:

At its current valuation, we find Pluxee to be cheap on an absolute and relative basis. At today’s share price (€25.97 per share) the Company has an enterprise value of ~€3.9bn. Based on our projections, this implies a ~10x EV / 2024 EBITDA multiple. We believe that a company with a sustainable growth runway and a capital-efficient business model should not trade at 10x. Another way to look at the Company is on a “FCF yield + growth” basis. At a 7.6% 2024 FCF yield (which includes slightly elevated investment in technology to “catch up” to Edenred) for a company growing its FCF at a mid-teens rate implies a ~25% IRR over the next few years. Purchasing at today’s price would translate into a ~14% NTM FCF yield by 2026. Given the growth profile, attractive business characteristics, and strong moat of this business, we think that the market is not fairly valuing the Company.

Looking at Pluxee on a relative valuation basis provides a similar picture. Edenred is the closest comparable to Pluxee and currently trades at 12x NTM EBITDA and 23x Fwd. P/E. While we believe some discount is warranted given the size difference and the diversification that Edenred’s other business lines provide, we believe that most of this discount relates to the disparity in execution over the last few years. As management proves its execution and closes the gap in business performance, we believe that this discount should close to a 15%-20% discount. At these multiples, it would represent a share price of €46-€51 and a 3-year IRR of 21%-25%. The picture becomes even more attractive when looking at the historical valuation of Edenred. Over the last 3 years, it has traded at an average of 17x NTM EBITDA and 30x Fwd. P/E. Currently, Edenred is facing negative news flows around a scandal in Italy – which resulted in a ~10% share price decline; we believe that the market is over-penalizing the business and that over time, the performance of the business will drive the multiple closer to its historical average. If Pluxee’s multiple was to approach a 20% discount to these historical multiples, it would be worth a price of €60-€71 per share, translating to a 3-year IRR of 32%-40%.  

Given the strong insider ownership (the Bellon family holds ~43%, representing a sizeable portion of the family’s net worth), we believe that if value is not realized in the public markets, management will eventually act to realize value in other ways. Prior to the spin-off, Sodexo (Pluxee’s parent) was evaluating strategic alternatives and was rumored to have received interest from private equity firms like Bain Capital. 

Risks and Mitigants:

1. Economic Downturn: If any given country were to experience a recessionary environment, where the increase in unemployment would undoubtedly create headwinds for Pluxee. However, there are a few nuances that partially mitigate this risk:

   1. Pluxee is geographically diversified. Operating in over thirty-one different countries, only two countries made up more than 10% of revenue; Brazil and France made up 27% and 12%, respectively. While it is likely that certain regions experience recessions in tandem, this diversification should provide some buffer against a downturn in any specific country. 

   2. The benefits compensation that Pluxee facilitates is inherently a more cost-effective method of compensation than cash compensation. Because of its tax benefits, it can be as much as 30% cheaper than paying an employee the same amount in cash. As a result, during times of recession, some companies will elect to increase the benefit portion of compensation instead of raising an employee’s salary. Similarly, they may elect to shift the compensation to have a higher proportion of tax-advantaged benefits. Although this would certainly not position the Company to be countercyclical, it does provide some insulation. 

   3. Since the runway for increasing penetration remains so long, the Company can offset weakness by continuing to penetrate the SME market. As described above, the cost-effectiveness of benefits compensation may help penetrate SMEs who would suffer disproportionately from a recession. Although this penetration story is not strong enough to overcome a broader downturn, it may provide some buffer against material underperformance. 

2. Regulatory Risk: Almost all of Pluxee’s business is tied to regulation (tax-exempt status) in some form. As a result, the Company’s business model relies on the tax break that the government remains in place. Hence, there are two regulatory risks for Pluxee:

   1. Firstly, there is the risk that a government gets rid of the tax break. Although this has precedent, happening in countries like Hungary and the UK, we do not believe that this is an extremely material risk. The policies Pluxee benefits from are typically socially oriented, with millions of citizens benefitting from them daily. We believe that the political capital necessary to upend the entire system is large. 

   2. Where we see the most risk is in the regulation of issuers. Recently, France and Brazil have begun probing the meal voucher market, causing concerns over potential changes to the market structure. In both countries, regulation has not been finalized. However, so far, the regulation has been modestly positive. In France, the Competitive Authority recommended no price caps (meaning that issuers can continue to charge their take rates) but recommended that the government look into creating an interoperable system. As of today, we are unsure if / how this will be implemented. In Brazil, there are bureaucratic disputes and regime changes that have slowed down the regulation of the meal voucher system. However, the Central Bank (which has been the relevant authority) has argued that interoperability would increase the barriers to entry and be counterproductive. We are unaware of any other pending changes to other countries’ benefit systems. 

   3. While there is undoubtedly a risk that legislation changes how profitable issuers can be, we believe we are adequately being compensated for this risk. 

3. Foreign Exchange / Interest Rate: Since the Company’s business spans multiple continents, there can be some noise around foreign exchange translation. Additionally, due to interest on their float being a highly profitable source of revenue, the Company is sensitive to fluctuations in the interest rate. 

   1. The Company keeps most of the cash in the geography to which the corresponding revenues are generated. Matching the costs and liquidity by geography limits any potential operational risks. Nevertheless, there is the risk that if currencies weaken relative to the Euro, it will adversely affect the Company’s reported profits. While it is impossible to predict the fluctuations in foreign exchange rates, the Company has guided that “devaluation risk should be offset in most cases by high-interest rates.”

   2. Although interest rates will come down over the next few years, we believe that the growth in business volume issued – and, as a result, growth in float – should offset the interest rate headwind. 

Catalyst

Continued Strong Execution 

Resolution of Regulatory Overhang (for Edenred and Employee Benefits Issuers more broadly)

Accretive M&A / Returning Capital to Shareholders