Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

Equity Bottom-Up

Guararapes Confeccoes SA / Equity Bottom-Up

<ul>
<li>
<a href="https://www.smartkarma.com/entities/28023" target="_blank" data-smartkarma-citation="entities:28023:1">Guararapes Confeccoes SA (GUAR3 BZ)</a>, is a top three competitor to Brazilian market leader <a href="https://www.smartkarma.com/entities/24472" target="_blank" data-smartkarma-citation="entities:24472:1">Lojas Renner SA (LREN3 BZ)</a> in apparel retail</li>
<li>Its consumer credit book, including credit card loan exposure, of BRL4.1bn (USD1.1bn) is held by Guararapes’ 100% owned corporate vehicle for consumer credit, Midway Financiera. Midway  has delivered premium ROAE over 2015-18, and, although its NPL coverage is lower than Renner's, it has a very solid capital position</li>
<li>We apply a bear (9x) and bull (16x) range of historic (2018A) PE multiples for its consumer finance arm Midway Financiera. We estimate that this values Guararapes’ consumer credit businesses in a range of USD500-889m, equivalent to a range of 22%-38% of Guararapes' market capitalisation</li>
<li>We believe that Guararapes equity is an attractive investment, trading on consensus PE multiples of 15.6x for 2019E and 12.8x for 2020E, and EV/EBITDA multiples of 8.2x for 2019E and 7.1x for 2020E. Although we recognise that Guararapes should trade at a discount to Renner, we believe that Guararapes has potential to re-rate and narrow its discounted valuation</li>
</ul>



Guararapes Confeccoes SA (GUAR3 BZ), is a top three competitor to Brazilian market leader Lojas Renner SA (LREN3 BZ) in apparel retail
Its consumer credit book, including credit card loan exposure, of BRL4.1bn (USD1.1bn) is held by Guararapes’ 100% owned corporate vehicle for consumer credit, Midway Financiera. Midway  has delivered premium ROAE over 2015-18, and, although its NPL coverage is lower than Renner's, it has a very solid capital position
We apply a bear (9x) and bull (16x) range of historic (2018A) PE multiples for its consumer finance arm Midway Financiera. We estimate that this values Guararapes’ consumer credit businesses in a range of USD500-889m, equivalent to a range of 22%-38% of Guararapes' market capitalisation
We believe that Guararapes equity is an attractive investment, trading on consensus PE multiples of 15.6x for 2019E and 12.8x for 2020E, and EV/EBITDA multiples of 8.2x for 2019E and 7.1x for 2020E. Although we recognise that Guararapes should trade at a discount to Renner, we believe that Guararapes has potential to re-rate and narrow its discounted valuation


Guararapes: Good Value in Brazil Retailing, Sound Presence in Consumer Finance

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<ul class="">
<li>
<a href="https://www.smartkarma.com/entities/24564" target="_blank" data-smartkarma-citation="entities:24564:1">Banco Do Brasil Sa (BBAS3 BZ)</a> management is exploring non-core disposals, across its investment portfolio</li>
<li>Its stakes in Banco Votorantim, utility holding Neoenergia and its Argentinian subsidiary <a href="https://www.smartkarma.com/entities/24431" target="_blank" data-smartkarma-citation="entities:24431:1">Banco Patagonia Sa (BPAT AR)</a> have been most readily mentioned, and are the most likely candidates, in our view</li>
<li>The disposal timings, we expect, could be nearer term for domestic, Brazilian assets, with Banco Patagonia more likely to be a longer term project (2020?); still, we see such potential disposals as positive catalysts for Banco do Brasil shares</li>
<li>We estimate that the CET1 accretion from disposals could total 73-80bps, of which the net gain from these potential disposals could add between 10-17 bps , with the risk weighted asset (RWA) reduction expected to free up an additional 63bps of CET1</li>
</ul>



Banco Do Brasil Sa (BBAS3 BZ) management is exploring non-core disposals, across its investment portfolio
Its stakes in Banco Votorantim, utility holding Neoenergia and its Argentinian subsidiary Banco Patagonia Sa (BPAT AR) have been most readily mentioned, and are the most likely candidates, in our view
The disposal timings, we expect, could be nearer term for domestic, Brazilian assets, with Banco Patagonia more likely to be a longer term project (2020?); still, we see such potential disposals as positive catalysts for Banco do Brasil shares
We estimate that the CET1 accretion from disposals could total 73-80bps, of which the net gain from these potential disposals could add between 10-17 bps , with the risk weighted asset (RWA) reduction expected to free up an additional 63bps of CET1


Banco Do Brasil (BBAS3) - Capital Contributions from Potential Non-Core Disposals

Thematic (Sector/Industry)

<ul class="">
<li>The non-cash payments market continues to grow at a double-digit rate in Brazil, driven primarily by growing usage of credit and debit cards</li>
<li>De-regulation and new entrants have brought challenges for the incumbents, especially for the largest player <a href="https://www.smartkarma.com/entities/24750" target="_blank">Cielo SA (CIEL3 BZ)</a>, with the challengers taking market share, squeezing margins and promoting better service for SME merchants in particular</li>
<li>Competitive pressures continue in the Brazil payments market, reflected in the declining merchant discount rate (MDR), lower rental rates and sale prices for POS terminals, as well as pressure on the commissions for early payment of merchant receivables; the near-term prospects for Cielo remain challenging in our view</li>
<li>Due to the ongoing headwinds, we expect Cielo to show negative earnings growth to 2021; management has announced that Cielo will defend its market share against the challengers; we see further downside risk to consensus earnings and the real risk of a greater than consensus 2019 DPS cut</li>
<li>
<a href="https://www.smartkarma.com/entities/27564" target="_blank">StoneCo Ltd (STNE US)</a>and <a href="https://www.smartkarma.com/entities/27939" target="_blank">Pagseguro Digital Ltd (PAGS US)</a> are two of the payment challengers in this de-regulated market, growing faster than the Brazilian non-cash transactions market and taking incumbents' market share; we see StoneCo to be the preferred entity to PagSeguro, based on StoneCo’s higher revenue yielding SME segment of focus and on its more attractive PEG ratio valuation</li>
</ul>


The non-cash payments market continues to grow at a double-digit rate in Brazil, driven primarily by growing usage of credit and debit cards
De-regulation and new entrants have brought challenges for the incumbents, especially for the largest player Cielo SA (CIEL3 BZ), with the challengers taking market share, squeezing margins and promoting better service for SME merchants in particular
Competitive pressures continue in the Brazil payments market, reflected in the declining merchant discount rate (MDR), lower rental rates and sale prices for POS terminals, as well as pressure on the commissions for early payment of merchant receivables; the near-term prospects for Cielo remain challenging in our view
Due to the ongoing headwinds, we expect Cielo to show negative earnings growth to 2021; management has announced that Cielo will defend its market share against the challengers; we see further downside risk to consensus earnings and the real risk of a greater than consensus 2019 DPS cut

StoneCo Ltd (STNE US)and Pagseguro Digital Ltd (PAGS US) are two of the payment challengers in this de-regulated market, growing faster than the Brazilian non-cash transactions market and taking incumbents' market share; we see StoneCo to be the preferred entity to PagSeguro, based on StoneCo’s higher revenue yielding SME segment of focus and on its more attractive PEG ratio valuation


Brazilian Payments Report: Cielo on the Defensive Against Disruptive Challengers

<ul>
<li>A rising pro-market tide has lifted the big-cap banks, but now it is time to be more selective. We see further potential for stock re-rating among the Brazilian banks, as the new Bolosonaro administration executes its pro-market policies.</li>
<li>Our top pick is <a href="https://www.smartkarma.com/entities/24564" target="_blank">Banco Do Brasil Sa (BdoBAS3 BZ)</a> , with a target price of BRL57, which implies 19% re-rating potential. We believe that Banco do Brasil (BdoB) shareholders are set to benefit from less of a “social programme” agenda which in turn should help improve ROE going forward.</li>
<li>Yet the PBV discount between BdoB and its private sector peers - especially against Itaú Unibanco at 52% - has barely narrowed, and we believe that the discount has potential to narrow further as BdoB’s ROE expands and narrows the gap with its private sector peers.</li>
</ul>


A rising pro-market tide has lifted the big-cap banks, but now it is time to be more selective. We see further potential for stock re-rating among the Brazilian banks, as the new Bolosonaro administration executes its pro-market policies.
Our top pick is Banco Do Brasil Sa (BdoBAS3 BZ) , with a target price of BRL57, which implies 19% re-rating potential. We believe that Banco do Brasil (BdoB) shareholders are set to benefit from less of a “social programme” agenda which in turn should help improve ROE going forward.
Yet the PBV discount between BdoB and its private sector peers - especially against Itaú Unibanco at 52% - has barely narrowed, and we believe that the discount has potential to narrow further as BdoB’s ROE expands and narrows the gap with its private sector peers.


Brazil Banks: Banco Do Brasil Focus - Prospects for Improved Returns, Narrowing PBV Discount

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

Overwhelmingly, and to take a line from our U.S. Compass report, recent declines have corrected the excess. Where many charts appeared stretched and even parabolic in some cases, recent downward pressure on global equities has allowed many stocks to return to solid entry points near various areas of support. In today’s report we review every global sector, highlighting actionable stocks within each.

Overwhelmingly, and to take a line from our U.S. Compass report, recent declines have corrected the excess. Where many charts appeared stretched and even parabolic in some cases, recent downward pressure on global equities has allowed many stocks to return to solid entry points near various areas of support. In today’s report we review every global sector, highlighting actionable stocks within each.

Brazil

Banco do Brasil S.A. attracts deposits and offers retail and commercial banking services.  The Bank offers consumer, commercial, and agribusiness loans, asset management, foreign exchange, private pension, insurance, lease financing, credit cards, and Internet banking services.

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Banco do Brasil (BBAS3 BZ)

Guararapes: Good Value in Brazil Retailing, Sound Presence in Consumer Finance

Guararapes Confeccoes SA (GUAR3 BZ), is a top three competitor to Brazilian market leader Lojas Renner SA (LREN3 BZ) in apparel retail Its...

Victor Galliano

Banco Do Brasil (BBAS3) - Capital Contributions from Potential Non-Core Disposals

Banco Do Brasil Sa (BBAS3 BZ) management is exploring non-core disposals, across its investment portfolio Its stakes in Banco Votorantim, utility...

Boost Research

Brazilian Payments Report: Cielo on the Defensive Against Disruptive Challengers

The non-cash payments market continues to grow at a double-digit rate in Brazil, driven primarily by growing usage of credit and debit...

Boost Research

Brazil Banks: Banco Do Brasil Focus - Prospects for Improved Returns, Narrowing PBV Discount

A rising pro-market tide has lifted the big-cap banks, but now it is time to be more selective. We see further potential for stock re-rating among...

Boost Research

Global Equity Strategy

Overwhelmingly, and to take a line from our U.S. Compass report, recent declines have corrected the excess. Where many charts appeared stretched...

Vermilion Research

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