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

<ul>
<li>Our post mortem of 2019 recommendations shows that we have had some successes; good bull calls were <a href="https://www.smartkarma.com/entities/gentera-sab-de-cv" target="_blank" data-smartkarma-citation="entities:27889:1" rel="noopener">Gentera SAB De CV (GENTERA* MM EQUITY)</a> in Mexico, <a href="https://www.smartkarma.com/entities/unicredit-spa" target="_blank" data-smartkarma-citation="entities:21234:1" rel="noopener">UniCredit SpA (UCG IM)</a> in Italy, <a href="https://www.smartkarma.com/entities/credicorp-ltd" target="_blank" data-smartkarma-citation="entities:25963:1" rel="noopener">Credicorp Ltd (BAP US)</a> in Peru, <a href="https://www.smartkarma.com/entities/xp-inc" target="_blank" data-smartkarma-citation="entities:28619:1" rel="noopener">XP Inc (XP US)</a> in Brazil and, to a lesser degree, <a href="https://www.smartkarma.com/entities/banco-do-brasil-sa" target="_blank" data-smartkarma-citation="entities:24564:1" rel="noopener">Banco Do Brasil Sa (BBAS3 BZ),</a><a href="https://www.smartkarma.com/entities/banco-inter-sa" target="_blank" data-smartkarma-citation="entities:28162:1" rel="noopener">Banco Inter SA (BIDI11 BZ)</a> and <a href="https://www.smartkarma.com/entities/itausa-investimentos-itau-pr" target="_blank" data-smartkarma-citation="entities:24513:1" rel="noopener">Itausa-Investimentos Itau-Pr (ITSA4 BZ)</a>
</li>
<li>On the bearish side, <a href="https://www.smartkarma.com/entities/cielo-sa" target="_blank" data-smartkarma-citation="entities:24750:1" rel="noopener">Cielo SA (CIEL3 BZ)</a> worked well to October 2019 , also <a href="https://www.smartkarma.com/entities/itau-corpbanca" target="_blank" data-smartkarma-citation="entities:27602:1" rel="noopener">Itau CorpBanca (ITAUCORP CI)</a> and, in 4Q 2019, the bear call on <a href="https://www.smartkarma.com/entities/b3-sa-brasil-bolsa-balcao" target="_blank" data-smartkarma-citation="entities:24580:1" rel="noopener">B3 Sa - Brasil Bolsa Balcao (B3SA3 BZ) </a>is bearing fruit</li>
<li>Less successful calls include the bear stances on <a href="https://www.smartkarma.com/entities/grupo-financiero-banorte-o" target="_blank" data-smartkarma-citation="entities:24780:1" rel="noopener">Grupo Financiero Banorte-O (GFNORTEO MM)</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> and the bull positions on <a href="https://www.smartkarma.com/entities/ripley-corp-sa" target="_blank" data-smartkarma-citation="entities:28022:1" rel="noopener">Ripley Corp SA (RIPLEY CI), </a><a href="https://www.smartkarma.com/entities/el-puerto-de-liverpool-sab-de" target="_blank" data-smartkarma-citation="entities:27611:1" rel="noopener">El Puerto de Liverpool SAB de (LIVEPOLC MM)</a> and <a href="https://www.smartkarma.com/entities/banco-santander-chile-a1d94c50-bd10-465a-a389-8383b9836732" target="_blank" data-smartkarma-citation="entities:28621:1" rel="noopener">Banco Santander Chile (BSAC US)</a> </li>
<li>We believe that the rotation into value in 2H 2019 should continue into at least 1Q 2020, benefiting European and Emerging Market banks and financials amongst other sectors</li>
<li>In the value category, for 2020, we continue to like <a href="https://www.smartkarma.com/entities/banco-do-brasil-sa" target="_blank" data-smartkarma-citation="entities:24564:1" rel="noopener">Banco Do Brasil Sa (BBAS3 BZ)</a> , <a href="https://www.smartkarma.com/entities/unicredit-spa" target="_blank" data-smartkarma-citation="entities:21234:1" rel="noopener">UniCredit SpA (UCG IM)</a> and <a href="https://www.smartkarma.com/entities/cielo-sa" target="_blank" data-smartkarma-citation="entities:24750:1" rel="noopener">Cielo SA (CIEL3 BZ)</a> now a bull call since October</li>
<li>In the fintech growth space, we would also highlight <a href="https://www.smartkarma.com/entities/banco-inter-sa" target="_blank" data-smartkarma-citation="entities:28162:1" rel="noopener">Banco Inter SA (BIDI11 BZ)</a> </li>
<li>
<a href="https://www.smartkarma.com/entities/credicorp-ltd" target="_blank" data-smartkarma-citation="entities:25963:1" rel="noopener">Credicorp Ltd (BAP US)</a> has further to go, in our view, and so it remains a positive recommendation for 2020</li>
<li>Names to watch, for any potential catalysts for change, include <a href="https://www.smartkarma.com/entities/grupo-financiero-banorte-o" target="_blank" data-smartkarma-citation="entities:24780:1" rel="noopener">Grupo Financiero Banorte-O (GFNORTEO MM)</a> and <a href="https://www.smartkarma.com/entities/itau-corpbanca" target="_blank" data-smartkarma-citation="entities:27602:1" rel="noopener">Itau CorpBanca (ITAUCORP CI)</a> </li>
<li>Risks include worsening sentiment towards equity markets, and a swing to a more "risk off" investment climate driven by global GDP growth concerns, increased US-China trade tensions and any increase in political tension in Latin America and Southern Europe</li>
</ul>


Our post mortem of 2019 recommendations shows that we have had some successes; good bull calls were Gentera SAB De CV (GENTERA* MM EQUITY) in Mexico, UniCredit SpA (UCG IM) in Italy, Credicorp Ltd (BAP US) in Peru, XP Inc (XP US) in Brazil and, to a lesser degree, Banco Do Brasil Sa (BBAS3 BZ),Banco Inter SA (BIDI11 BZ) and Itausa-Investimentos Itau-Pr (ITSA4 BZ)

On the bearish side, Cielo SA (CIEL3 BZ) worked well to October 2019 , also Itau CorpBanca (ITAUCORP CI) and, in 4Q 2019, the bear call on B3 Sa - Brasil Bolsa Balcao (B3SA3 BZ) is bearing fruit
Less successful calls include the bear stances on Grupo Financiero Banorte-O (GFNORTEO MM) and MercadoLibre Inc (MELI US) and the bull positions on Ripley Corp SA (RIPLEY CI), El Puerto de Liverpool SAB de (LIVEPOLC MM) and Banco Santander Chile (BSAC US) 
We believe that the rotation into value in 2H 2019 should continue into at least 1Q 2020, benefiting European and Emerging Market banks and financials amongst other sectors
In the value category, for 2020, we continue to like Banco Do Brasil Sa (BBAS3 BZ) , UniCredit SpA (UCG IM) and Cielo SA (CIEL3 BZ) now a bull call since October
In the fintech growth space, we would also highlight Banco Inter SA (BIDI11 BZ) 

Credicorp Ltd (BAP US) has further to go, in our view, and so it remains a positive recommendation for 2020
Names to watch, for any potential catalysts for change, include Grupo Financiero Banorte-O (GFNORTEO MM) and Itau CorpBanca (ITAUCORP CI) 
Risks include worsening sentiment towards equity markets, and a swing to a more "risk off" investment climate driven by global GDP growth concerns, increased US-China trade tensions and any increase in political tension in Latin America and Southern Europe


Galliano's Latin Notes 2019 Recommendations in Review, and Initial Thoughts for 2020

<ul>
<li>We see further scope for consensus earnings and EBITDA disappointment at <a href="https://www.smartkarma.com/entities/mercadolibre-inc" target="_blank" data-smartkarma-citation="entities:27954:1" rel="noopener">MercadoLibre Inc (MELI US)</a>
</li>
<li>In the FinTech operations, where MELI is growing and investing in payments, the competitive pressure is intense, especially but not exclusively in Brazil</li>
<li>We think this intensely competitive environment, reflected in the high sales and marketing costs, will continue to pressure returns and EBITDA margins in the coming quarters</li>
<li>Consequently, we expect further cuts to consensus EPS and EBITDA estimates in the near term, and a prospective share de-rating</li>
<li>Risks to our thesis include less than expected pressure on Merchant Discount Rates in Brazil, boosting revenue growth and a stricter control of opex</li>
</ul>


We see further scope for consensus earnings and EBITDA disappointment at MercadoLibre Inc (MELI US)

In the FinTech operations, where MELI is growing and investing in payments, the competitive pressure is intense, especially but not exclusively in Brazil
We think this intensely competitive environment, reflected in the high sales and marketing costs, will continue to pressure returns and EBITDA margins in the coming quarters
Consequently, we expect further cuts to consensus EPS and EBITDA estimates in the near term, and a prospective share de-rating
Risks to our thesis include less than expected pressure on Merchant Discount Rates in Brazil, boosting revenue growth and a stricter control of opex


MercadoLibre (MELI) - FinTech Operations Opex Pressures to Weigh on Consensus Estimates

Thematic (Sector/Industry)

<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

<ul>
<li>
<a href="https://www.smartkarma.com/entities/27954" target="_blank" data-smartkarma-citation="entities:27954:1">MercadoLibre Inc (MELI US)</a> is the leading e-commerce platform in Latin America, present in 18 countries in the region, with Gross Merchandise Volume (GMV) of USD12.5bn in 2018</li>
<li>We estimate that in its fintech operations, the vast majority of the value lies in the MercadoPago payments business, with its growing presence in Brazil, versus the more recently established credit business MercadoCredito</li>
<li>We estimate that our valuation of MercadoPago and MercadoCredito is in a range of USD3.6-6.8bn, equivalent to a range of 15%-28% of the market cap</li>
<li>The first challenges we see for MELI going forward is that 26% of the group’s 2018 revenues were derived from Argentina; the economy is in deep recession, and the upcoming Presidential elections in October could result in a populist and market-unfriendly outcome</li>
<li>In addition, the intensifying market share contest in the Brazilian payments industry, with incumbents increasing price competition, is likely to hit returns in MercadoPago Brasil</li>
<li>We recognize the solidity and growth potential of the MELI e-commerce operations throughout Latin America, and the payment entity's contribution to the overall group valuation; however, we are cautious on MELI shares due to valuation, and we expect the shares to de-rate going forward, especially as the negative catalysts of increased competition in Brazil payments and Argentina macro and political concerns make an impact</li>
</ul>



MercadoLibre Inc (MELI US) is the leading e-commerce platform in Latin America, present in 18 countries in the region, with Gross Merchandise Volume (GMV) of USD12.5bn in 2018
We estimate that in its fintech operations, the vast majority of the value lies in the MercadoPago payments business, with its growing presence in Brazil, versus the more recently established credit business MercadoCredito
We estimate that our valuation of MercadoPago and MercadoCredito is in a range of USD3.6-6.8bn, equivalent to a range of 15%-28% of the market cap
The first challenges we see for MELI going forward is that 26% of the group’s 2018 revenues were derived from Argentina; the economy is in deep recession, and the upcoming Presidential elections in October could result in a populist and market-unfriendly outcome
In addition, the intensifying market share contest in the Brazilian payments industry, with incumbents increasing price competition, is likely to hit returns in MercadoPago Brasil
We recognize the solidity and growth potential of the MELI e-commerce operations throughout Latin America, and the payment entity's contribution to the overall group valuation; however, we are cautious on MELI shares due to valuation, and we expect the shares to de-rate going forward, especially as the negative catalysts of increased competition in Brazil payments and Argentina macro and political concerns make an impact


MercadoLibre: Competitive Headwinds in Brazil Payments, Macro and Political Concerns in Argentina

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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

Brazil

PagSeguro Digital Ltd. provides financial technology services. The Company offers multiple digital payment solutions, in-person payments via point of sales devices, and prepaid cards services. Pagseguro Digital serves clients in Brazil and the United States.

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Pagseguro Digital Ltd (PAGS US)

Galliano's Latin Notes 2019 Recommendations in Review, and Initial Thoughts for 2020

Our post mortem of 2019 recommendations shows that we have had some successes; good bull calls were Gentera SAB De CV (GENTERA* MM EQUITY) in...

Victor Galliano

MercadoLibre (MELI) - FinTech Operations Opex Pressures to Weigh on Consensus Estimates

We see further scope for consensus earnings and EBITDA disappointment at MercadoLibre Inc (MELI US) In the FinTech operations, where MELI is...

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

MercadoLibre: Competitive Headwinds in Brazil Payments, Macro and Political Concerns in Argentina

MercadoLibre Inc (MELI US) is the leading e-commerce platform in Latin America, present in 18 countries in the region, with Gross Merchandise...

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

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