Edenred and Pluxee Crashed....again
Is the investment case still intact?
While I was having a great time at Ragnarök Festival last week, Edenred and Pluxee had yet more problems.
Shares dropped by 17% (Edenred) and 10% (Pluxee) on Friday, another set back for the employee benefits industry which has been punished consistently over the last year. Let’s take a look at the cause of this sell of and what’s my opinion as an investor in both stocks.
What happened?
On the 24th April news broke that the Brazilian government is looking to regulate the PAT (Worker’s Food Program) and one discussed alternative is to replace the meal voucher system with a Pix payment made directly to the employee’s bank account (Pix is a widely used real-time payments system in Brazil, developed by the Central Bank of Brazil). This of course would mean a large impairment to Pluxee and Edenred Brazil business, which are some of the largest markets for both companies (#1 for Pluxee and #2 for Edenred after France).
Brazil wants to reduce food inflation and sees cutting the take rate of middlemen as one solution. The idea is still in consideration and we might see a first legislative proposal in the coming weeks. Lower income citizens are hit the worst by food inflation and need the PAT system. The main criticism of the proposal is that directly paying the benefits to employees would make it hard or impossible to track if its used for food purchases and not other purposes.
PAT has been a cornerstone in the Brazilian social system for almost 50 years and today serves more than 23 million Brazilians, especially those earning up to 5 times minimum wage. PAT is not mandatory and companies offer them because of the tax benefits for both employer and employee. As direct payments it would probably not have these tax benefits anymore and companies would cut these non-mandatory payments in mass, hurting the already struggling lower income consumer.
What now?
In the next sections I’ll discuss:
The feasibility of the proposal and the potential impairment to the business.
Second order effects of the proposal globally.
How it changes the valuation of Edenred and Pluxee.
What I’m doing with my shares representing around 8% of my portfolio.