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.

Thematic (Sector/Industry)

<ul>
<li>The secular drive to digital payments is a boon for large Fintechs, and is reflected in the <a href="https://www.smartkarma.com/entities/paypal-holdings-inc" target="_blank" data-smartkarma-citation="entities:4747:1" rel="noopener">Paypal Holdings (PYPL US)</a> and <a href="https://www.smartkarma.com/entities/mercadolibre-inc" target="_blank" data-smartkarma-citation="entities:27954:1" rel="noopener">MercadoLibre Inc (MELI US)</a> share re-ratings</li>
<li>PayPal’s US and European operations are set to retain their edge, in our view, along with fast growth in its US P2P payments app Venmo</li>
<li>Aside from e-commerce, MercadoLibre’s fintech arm MercadoPago is another growth engine for this LatAm e-commerce entity</li>
<li>PYPL and MELI’s re-ratings to continue to be driven by the positive investor momentum around digital and e-commerce, and their strong positioning to gain further share; based on valuations, we prefer PYPL to MELI, although with the latter positive momentum is also in the driving seat, at least for now</li>
<li>One Brazil fintech that should play catch-up on re-rating is <a href="https://www.smartkarma.com/entities/pagseguro-digital-ltd" target="_blank" data-smartkarma-citation="entities:27939:1" rel="noopener">Pagseguro Digital Ltd (PAGS US)</a>; PAGS is well positioned to continue to grow and capture digital banking as well as merchant services and e-payments share in Brazil</li>
<li>Risks to our view include slower than expected growth in payments at PYPL along with higher than expected credit delinquencies, increased competition for PAGS holding back growth and a lag in recovery of PAGS’s hospitality-focused clients</li>
</ul>


The secular drive to digital payments is a boon for large Fintechs, and is reflected in the Paypal Holdings (PYPL US) and MercadoLibre Inc (MELI US) share re-ratings
PayPal’s US and European operations are set to retain their edge, in our view, along with fast growth in its US P2P payments app Venmo
Aside from e-commerce, MercadoLibre’s fintech arm MercadoPago is another growth engine for this LatAm e-commerce entity
PYPL and MELI’s re-ratings to continue to be driven by the positive investor momentum around digital and e-commerce, and their strong positioning to gain further share; based on valuations, we prefer PYPL to MELI, although with the latter positive momentum is also in the driving seat, at least for now
One Brazil fintech that should play catch-up on re-rating is Pagseguro Digital Ltd (PAGS US); PAGS is well positioned to continue to grow and capture digital banking as well as merchant services and e-payments share in Brazil
Risks to our view include slower than expected growth in payments at PYPL along with higher than expected credit delinquencies, increased competition for PAGS holding back growth and a lag in recovery of PAGS’s hospitality-focused clients


Payments: Momentum Driving MercadoLibre Now; PayPal & PagSeguro Attractive on Growth & Fundamentals

<ul>
<li>We upgrade <a href="https://www.smartkarma.com/entities/cielo-sa" target="_blank" data-smartkarma-citation="entities:24750:1" rel="noopener">Cielo SA (CIEL3 BZ)</a> to a buy, and downgrade <a href="https://www.smartkarma.com/entities/pagseguro-digital-ltd" target="_blank" data-smartkarma-citation="entities:27939:1" rel="noopener">Pagseguro Digital Ltd (PAGS US)</a> and <a href="https://www.smartkarma.com/entities/stoneco-ltd" target="_blank" data-smartkarma-citation="entities:27564:1" rel="noopener">StoneCo Ltd (STNE US)</a> to sell</li>
<li>Cielo is starting to retain market share, and the latest Merchant Discount Rate (MDR) data offers near term relief to the incumbent acquirers, in our view</li>
<li>Valuation multiple differentials appear to be largely reflecting the growth opportunity for the challengers, and under-estimating the incumbents' ability to generate lower, but still positive, returns</li>
<li>Capital IQ consensus earnings revisions indicate that the worst of the consensus earnings cuts for Cielo may be over; management is responding with improved customer service and reallocating resources to more productive tasks</li>
<li>For PagSeguro and StoneCo we believe that the most positive earnings revisions may be in the rear view mirror at least for now, as the Brazilian payments industry is a crowded space for challengers too</li>
<li>Risks to our view include worse than expected attrition of MDRs, a stubbornly high cost base at Cielo as well as stronger than expected market share gains and cost efficiencies derived by the challengers</li>
</ul>


We upgrade Cielo SA (CIEL3 BZ) to a buy, and downgrade Pagseguro Digital Ltd (PAGS US) and StoneCo Ltd (STNE US) to sell
Cielo is starting to retain market share, and the latest Merchant Discount Rate (MDR) data offers near term relief to the incumbent acquirers, in our view
Valuation multiple differentials appear to be largely reflecting the growth opportunity for the challengers, and under-estimating the incumbents' ability to generate lower, but still positive, returns
Capital IQ consensus earnings revisions indicate that the worst of the consensus earnings cuts for Cielo may be over; management is responding with improved customer service and reallocating resources to more productive tasks
For PagSeguro and StoneCo we believe that the most positive earnings revisions may be in the rear view mirror at least for now, as the Brazilian payments industry is a crowded space for challengers too
Risks to our view include worse than expected attrition of MDRs, a stubbornly high cost base at Cielo as well as stronger than expected market share gains and cost efficiencies derived by the challengers


Brazil Payment Companies; Rotating from Growth to Value - Buy Cielo, Sell Pagseguro, StoneCo

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<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

Equity Bottom-Up

<ul>
<li>In the current volatile investment climate, we rein in our buy ratings retaining just one name despite the continuing attractive valuation metrics</li>
<li>We remove attractively valued PagBank and recent IPO PayPay from our payments buy list, due to a more volatile, potentially “risk-off”, investment climate</li>
<li>We keep only Klarna on the buy list, due management’s solid execution and attractive valuations, but we advise reducing positions</li>
</ul>


In the current volatile investment climate, we rein in our buy ratings retaining just one name despite the continuing attractive valuation metrics
We remove attractively valued PagBank and recent IPO PayPay from our payments buy list, due to a more volatile, potentially “risk-off”, investment climate
We keep only Klarna on the buy list, due management’s solid execution and attractive valuations, but we advise reducing positions


Payment Companies Update: Reining in Positive Recommendations

<ul>
<li>We add PayPay to our coverage and to our payments company buy list for its GARP qualities</li>
<li>We also add Klarna to the buy list, for its deep value credentials across the broader peer group, and also fro its improving EBITDA margin</li>
<li>We keep Affirm on the sell list, creating an effective pairs trade in the BNPL space with a buy on Klarna and a sell on Affirm</li>
</ul>


We add PayPay to our coverage and to our payments company buy list for its GARP qualities
We also add Klarna to the buy list, for its deep value credentials across the broader peer group, and also fro its improving EBITDA margin
We keep Affirm on the sell list, creating an effective pairs trade in the BNPL space with a buy on Klarna and a sell on Affirm


PayPay (PAYP) Post-IPO and Payment Companies Update

Brazil

PagSeguro Digital Ltd. is a Brazilian financial technology company that provides digital payment and financial solutions primarily for consumers, individual entrepreneurs, micro-merchants, and small to medium-sized businesses. The company offers a range of products including point-of-sale (POS) devices, online payment tools, digital banking services via PagBank, and various credit and investment solutions. It was founded in 2006 and is headquartered in São Paulo, Brazil.

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PagSeguro Digital (PAGS US)

Payments: Momentum Driving MercadoLibre Now; PayPal & PagSeguro Attractive on Growth & Fundamentals

The secular drive to digital payments is a boon for large Fintechs, and is reflected in the Paypal Holdings (PYPL US) and MercadoLibre Inc (MELI...

Victor Galliano

Brazil Payment Companies; Rotating from Growth to Value - Buy Cielo, Sell Pagseguro, StoneCo

We upgrade Cielo SA (CIEL3 BZ) to a buy, and downgrade Pagseguro Digital Ltd (PAGS US) and StoneCo Ltd (STNE US) to sell Cielo is starting to...

Victor Galliano

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

Payment Companies Update: Reining in Positive Recommendations

In the present volatile investment climate, only Klarna remains on our buy list due to solid execution and attractive valuations; our caution...

Victor Galliano

PayPay (PAYP) Post-IPO and Payment Companies Update

Adding GARP play PayPay and deep value Klarna to buy list for their growth potential, while keeping Affirm on sell list for pairs trade strategy...

Victor Galliano

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Payments: Momentum Driving MercadoLibre Now; PayPal & PagSeguro Attractive on Growth & Fundamentals

The secular drive to digital payments is a boon for large Fintechs, and is reflected in the Paypal Holdings (PYPL US) and MercadoLibre Inc (MELI...

Victor Galliano

Brazil Payment Companies; Rotating from Growth to Value - Buy Cielo, Sell Pagseguro, StoneCo

We upgrade Cielo SA (CIEL3 BZ) to a buy, and downgrade Pagseguro Digital Ltd (PAGS US) and StoneCo Ltd (STNE US) to sell Cielo is starting to...

Victor Galliano

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

Payment Companies Update: Reining in Positive Recommendations

​In the present volatile investment climate, only Klarna remains on our buy list due to solid execution and attractive valuations; our caution...

Victor Galliano

PayPay (PAYP) Post-IPO and Payment Companies Update

​Adding GARP play PayPay and deep value Klarna to buy list for their growth potential, while keeping Affirm on sell list for pairs trade strategy...

Victor Galliano

In the present volatile investment climate, only Klarna remains on our buy list due to solid execution and attractive valuations; our caution...

Adding GARP play PayPay and deep value Klarna to buy list for their growth potential, while keeping Affirm on sell list for pairs trade strategy...