PatchesAKF: April Update

Portfolio activity and news: Edenred, Megacable Holdings, PT Indocement

This blog has two objectives: 1) to share my research with a wider community, in hopes of receiving constructive feedback and bringing greater awareness to what I believe are attractive investment opportunities, and 2) to formalize my thoughts and create a record that I can scrutinize and learn from over time. I plan to post more regularly going forward, including a monthly portfolio update. Many of the coming posts are as much for myself as for my subscribers. I share my thoughts on portfolio-related news more regularly on X (Twitter) at @PatchesAKF

Portfolio Holdings

Over 75% of my assets are typically invested in 5-7 core holdings that I expect to own for several years. The rest of my portfolio is in opportunities that I believe have attractive reward-to-risk ratios but are shorter-term holdings or have some probability of significant capital impairment. These currently include investments in Chinese companies and special situations.

• Core: Barry Callebaut, Edenred SE, Logista Holdings, Megacable Holdings, Nexi Group, NexTone Inc, PT Indocement

• Other: GreenTree Hospitality, PDD Holdings 2027 Call Options, three undisclosed positions

Core Portfolio Activity

I made two changes to my core holdings in April: I sold Worldline and reallocated the capital to Nexi, and I started an investment in Barry Callebaut.

Entering 2025 I owned an equal amount of Worldline and Nexi. My thesis for these investments was largely the same—their local scale is a competitive advantage and the pessimism around their durability is excessive. Worldline has simpler accounting standards, a better balance sheet, and had a significantly cheaper valuation. Nexi has a stronger local competitive position (primarily in Italy), has handled the integration of its acquisitions better, and is overall better managed. In 2024 and early 2025, Nexi improved its balance sheet, introduced IFRS accounting statements (first on a proforma basis, but these will become the primary statements starting with 2025), and began returning capital to shareholders through share repurchases. Nexi’s fundamentals, particularly its organic growth and free cash flow, have also significantly outperformed Worldline’s. For these reasons, I decided to move from split exposure to a concentrated position in Nexi. The opportunity to make this transition came shortly after Trump announced the reciprocal tariffs program. On April 4, Nexi and Worldline were trading at similar free cash flow yields, so I sold Worldline and doubled my position in Nexi.

Barry Callebaut is the largest chocolate company in the world. Shortly after its earnings release this month, I started purchasing shares. I plan to publish a write-up on BC in the coming weeks.

Core Portfolio News: Edenred, Megacable Holdings, PT Indocement

Edenred announced Q1 sales, Pluxee (competitor) released FY25 H1 earnings, and, most importantly, a news report on April 25 claimed Brazil is considering eliminating the meal voucher system in favor of direct payments to employees via Pix. These are each discussed below.

Edenred’s Q1 sales growth was largely in line with expectations, which included solid growth in Latin America and a weak environment in Europe. There were multiple non-recurring headwinds for revenue growth in Europe, but even excluding these items European organic growth was modest. Edenred’s “Beyond” strategies for both Benefits & Engagement and Mobility continue to post strong organic growth, each increasing by a double-digit percentage in Q1 after rising by a similar amount in 2024. Given the challenging economic environment, Edenred is focused on cost control this year. Guidance for at least 10% organic EBITDA growth in 2025, including the fee cap in Italy and lower float income, was confirmed.

The notable item from Pluxee’s results was that it also saw strong growth in Latin America and a weak environment in Europe to start 2025. The table below compares organic growth for Edenred in Q1 and Pluxee in fiscal Q2 (ending February 28). The companies have a slightly different mix of payment solutions (Pluxee is ~85% Employee Benefits and Edenred is ~65%) and different countries of strength in each geographic region. While the comparison is thus not exact, it is clear the growth trends are industry-wide and not Edenred-specific (Edenred and Pluxee account for over 60% of the global employee benefits market).

The news article on changes being considered for meal vouchers in Brazil can be found here: link (translate with Google). The main point is that the government is considering replacing meal vouchers with direct payments through Pix. These payments would be made to employees at financial institutions where each employee has an account. Importantly, this is just one of the options being considered by the government. This policy would effectively eliminate the meal voucher industry in Brazil and be a worst-case scenario for Edenred Brazil. It would replace specific purpose payments that can only be used at specific merchants and for specific items (food and groceries) with general payments that can be used anywhere and for anything.

Some of the main effects of such a change for the various stakeholders are listed below (not all inclusive):

• Employees: would have increased flexibility to spend the funds. The result would be an effective increase in employee pay, assuming the benefits are continued by corporations.

• Merchants: would see a reduction in fees charged by meal voucher providers due to the elimination of traffic created by meal vouchers. Certainly, some employees would continue to allocate a portion of their income to these merchants, but some employees would replace consumption at these merchants with other uses. Small local merchants would see the greatest negative effect from this change (other than meal voucher providers).

• Corporations: would see a reduction in fees charged by meal voucher providers, although these are typically minor. If the funds are paid directly to employees, the associated tax benefits may eventually be eliminated given the change in the payment’s nature (as it would effectively become income). This would increase costs for corporations and/or reduce the amount received by employees.

• Meal voucher providers: would see the elimination of fees received on both the issuance and redemption of meal vouchers. Additionally, the float and associated interest income would quickly decline to zero as outstanding meal vouchers are redeemed.

• Government: greater cost and regulatory burden as government-owned infrastructure becomes responsible for facilitating payments to employees. Additionally, the change could reduce sales tax collected, as funds may be withdrawn and used for informal consumption rather than being restricted to digital payments at established merchants.

There should be significant lobbying against this proposal. More than 23m employees receive meal vouchers and over a million merchants across Brazil accept meal vouchers as payment. Eliminating meal vouchers would be negative for those merchants, particularly the small local merchants. The Brazilian Association of Bars and Restaurants has already voiced its opposition to the proposal. Moreover, the three largest meal voucher providers, Alelo, Pluxee, and Edenred, have strategic relationships with four of the five largest banks in Brazil. Alelo (market leader) is owned by Banco do Brasil and Bradesco, Pluxee has a local distribution partnership with Santander, and Edenred has a local distribution partnership with Itaú Unibanco. These four banks account for over half of the banking assets in Brazil and wield considerable lobbying power.

Given the forces opposing this proposal and the seemingly minimal benefit it will bring to key stakeholders, I view this worst-case proposal as a low probability event. However, it does seem more likely that there will be changes to Brazil’s meal voucher industry, probably at the expense of providers. As stated in my initial report (Edenred SE - Patches AKF), though, Edenred’s share price seemingly already implied a negative change in Brazil’s meal voucher industry before this article was published.

Worst-case Downside: Edenred Brazil had operating revenue of €507m in 2024 (19% of total) and probably accounted for ~€40m of float income. Edenred’s Latin America operating EBITDA margin (i.e., excluding float income) was ~36% last year, which applied to Brazil implies operating EBITDA of €183m. Adding the ~€40m of float income, Brazil accounted for ~18% of 2024 EBITDA. Meal vouchers were ~46% of Brazil’s operating revenue last year. Eliminating this business would require a restructuring in Brazil to right-size expenses. Edenred Brazil should be able to maintain a healthy operating EBITDA margin (post restructuring) even with a 46% reduction in revenue. For comparison, Corpay’s mobility business in Brazil (similar to Edenred’s) has had €300m to €400m of revenue over the last several years and an EBITDA margin consistently above 50%. If, in this worst-case scenario, Edenred Brazil can maintain a 25% to 30% operating EBITDA margin (post restructuring) without meal vouchers, the total EBITDA headwind would be 11% to 12%. This compares to expected EBITDA growth of at least 10% in 2025 – so the proposal could erase just over one year of EBITDA growth.

Implied Valuation of Meal Voucher Business: In 2024, ~43% of Edenred’s operating revenue was from regulation-dependent meal vouchers, along with all the float income. Italy was ~28% of meal voucher operating revenue, Brazil was 20.5%, and France was ~16%, collectively ~64% of meal voucher operating revenue. Italy recently adjusted its regulations, with the fee cap announced in late 2024, and therefore should have a lower probability of major changes going forward. France is evaluating adjustments to its market and is expected to finalize changes sometime this year. And Brazil is discussed above. The other 36% of meal voucher operating revenue is spread across numerous countries.

Edenred’s unregulated operating revenue was ~€1.5b in 2024. There are multiple examples (across several geographies) of specific purpose payment companies operating at much smaller scales and maintaining an EBITDA margin similar to, and in some cases much higher than, Edenred’s consolidated operating EBITDA margin. Assuming regulated and unregulated revenue had the same operating EBITDA margin in 2024, unregulated services were ~46% of total EBITDA, meal vouchers were ~35%, and float income was ~19%. The table below shows the implied revenue and EBITDA split between these three groups for the LTM, 2025E, and 2025E without Brazil’s meal voucher business.

Using these estimates and valuing unregulated services at 12x to 14x 2025E EBITDA (the rational for at least this range is explained in my initial Edenred post), the implied valuation for Edenred’s meal voucher business (including float income) at the current share price is 3x to 5x 2025E EBITDA. The implied valuation excluding Brazil’s meal voucher business is 4x to 7x 2025E EBITDA.

Megacable Holdings released 2025 Q1 results, which were a continuation of the recent trend. Revenue grew a high single digit percent, driven entirely by subscriber growth, and the EBITDA margin improved slightly year-over-year as penetration in the expansion territories continues to increase. ARPU growth remains weak, largely due to Telmex’s policy of not increasing rates for double-play packages. Capex to sales continued to decline and should be over 250bp below 2024 for the full year (guidance is ~28% of sales). These trends should drive an explosion in FCF—two simplified measures of which are shown below—throughout 2025 and 2026. Finally, the board approved an ~8% increase in the dividend to Ps3.34 per share (~7% yield).

• Valuation: using LTM EBITDA, estimated maintenance capex to sales of 20% (management claims it is 15%), run-rate interest expense, and a 30% tax rate, the shares trade at ~6x P/E. A 10x to 12x P/E multiple implies an intrinsic value range of Ps78 to Ps94 per share.

PT Indocement announced an IDR2.25t share buyback to be approved at the AGM in May. This could repurchase nearly 13% of the shares outstanding—equal to ~29% of the floating shares—based on the April 30 share price. The buyback will be funded with cash on hand and free cash flow and completed over 12 months.

• Valuation: the shares continue to trade for less than $35/ton of owned integrated cement capacity.

Misc Research Notes

• On April 17, Global Payments announced the acquisition of Worldpay for 8.5x 2025E EBITDA including run-rate cost synergies (11.0x EBITDA ex-synergies). Private market transactions can be a good proxy of fair value for similar companies. Applying an 8.5x to 11.0x 2025E EBITDA multiple to Nexi implies an intrinsic value range of €8.3 to €12.0 per share.

Information Worth Sharing

• Interview with Niall Ferguson about the trade war: link

• Detailed explanation of trade deficits: link

• Apollo Deck: How are US consumers and firms responding to tariffs? link

Disclosure: I usually own shares, at the time of writing, of companies discussed on this blog. I write the articles myself; expressing my own opinions. I have no business relationship with any company mentioned on this blog. There are no plans to provide updates on my buying or selling activities for each stock. I may buy or sell shares of the companies discussed on this blog without notice for any reason at any time.

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