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>Brazil caps interchange fees on prepaid and debit cards, as from 1st April 2023, limiting revenues for Brazilian card issuers; Nubank and Inter seem most exposed, less so PagSeguro</li>
<li>We expect that Brazil fintechs StoneCo and Cielo, with their small card issuance operations, should be broadly unaffected</li>
<li>Nubank’s prospective revenue hit is more than 5%, Inter close to 5% and PagSeguro’s hit at 1-2%; we remain negative on Nubank, turn cautious on Inter, but find PagSeguro attractive</li>
</ul>


Brazil caps interchange fees on prepaid and debit cards, as from 1st April 2023, limiting revenues for Brazilian card issuers; Nubank and Inter seem most exposed, less so PagSeguro
We expect that Brazil fintechs StoneCo and Cielo, with their small card issuance operations, should be broadly unaffected
Nubank’s prospective revenue hit is more than 5%, Inter close to 5% and PagSeguro’s hit at 1-2%; we remain negative on Nubank, turn cautious on Inter, but find PagSeguro attractive


Brazil Fintech: New Cap on Card Interchange Fees, Nubank and Inter Look Most Exposed

<ul>
<li>Our key positive picks in payments are two Brazilian companies, <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/cielo-sa" target="_blank" data-smartkarma-citation="entities:24750:1" rel="noopener">Cielo SA (CIEL3 BZ)</a> </li>
<li>PagSeguro is our main pick, attractive on GARP metrics and with its higher take rate, it is our preference over its closest peer StoneCo</li>
<li>Cielo, the leading legacy payments company in Brazil, has seen its shares under pressure; yet fundamentals should be supported by the recent approval of WhatsApp Payments, given that Cielo is WhatsApp’s processor of payments</li>
<li>
<a href="https://www.smartkarma.com/entities/dlocal-ltd-uruguay" target="_blank" data-smartkarma-citation="entities:33377:1" rel="noopener">DLocal Ltd/Uruguay (DLO US)</a> listed on NASDAQ in early June; the shares are up by 150% from its IPO price, and, even given the growth potential, valuations are looking full, so we see an opportunity to take profits</li>
<li>
<a href="https://www.smartkarma.com/entities/square-inc" target="_blank" data-smartkarma-citation="entities:23755:1" rel="noopener">Square Inc (SQ US)</a> is another premium growth story, but one where we believe current valuations are running ahead of the fundamental prospects</li>
<li>
<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/mastercard-inc-class-a" target="_blank" data-smartkarma-citation="entities:15529:1" rel="noopener">Mastercard (MA US)</a>, although not as compelling on valuations as PagSeguro and Cielo, are also attractive stocks</li>
<li>Risks to our positive view on Cielo include lower than expected revenues from the WhatsApp Payments contract and for PagSeguro this includes a weaker than expected business climate for its core SME client base; risks to our negative calls on DLocal and Square include stronger than expected transaction activity and revenue generation going forward</li>
</ul>


Our key positive picks in payments are two Brazilian companies, Pagseguro Digital Ltd (PAGS US) and Cielo SA (CIEL3 BZ) 
PagSeguro is our main pick, attractive on GARP metrics and with its higher take rate, it is our preference over its closest peer StoneCo
Cielo, the leading legacy payments company in Brazil, has seen its shares under pressure; yet fundamentals should be supported by the recent approval of WhatsApp Payments, given that Cielo is WhatsApp’s processor of payments

DLocal Ltd/Uruguay (DLO US) listed on NASDAQ in early June; the shares are up by 150% from its IPO price, and, even given the growth potential, valuations are looking full, so we see an opportunity to take profits

Square Inc (SQ US) is another premium growth story, but one where we believe current valuations are running ahead of the fundamental prospects

Paypal Holdings (PYPL US)  and Mastercard (MA US), although not as compelling on valuations as PagSeguro and Cielo, are also attractive stocks
Risks to our positive view on Cielo include lower than expected revenues from the WhatsApp Payments contract and for PagSeguro this includes a weaker than expected business climate for its core SME client base; risks to our negative calls on DLocal and Square include stronger than expected transaction activity and revenue generation going forward


<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 Capital Markets

<ul>
<li>Our initial PicPay report assumed a post-money IPO valuation of USD2.5bn; the disclosed price range implies an IPO valuation of USD2.07bn to USD2.53bn, with between USD365m and USD500m being raised</li>
<li>The key challenge we see for PicPay is credit quality; stage 3 loans to total loans have risen fast, despite secured loans accounting for 70%+ of the total</li>
<li>We believe that PicPay is more comparable to Banco Pan not Inter and certainly not Nubank; therefore, we see more appropriate IPO pricing at the bottom of the range (USD16)</li>
</ul>


Our initial PicPay report assumed a post-money IPO valuation of USD2.5bn; the disclosed price range implies an IPO valuation of USD2.07bn to USD2.53bn, with between USD365m and USD500m being raised
The key challenge we see for PicPay is credit quality; stage 3 loans to total loans have risen fast, despite secured loans accounting for 70%+ of the total
We believe that PicPay is more comparable to Banco Pan not Inter and certainly not Nubank; therefore, we see more appropriate IPO pricing at the bottom of the range (USD16)


PicPay Pre-IPO Revisited – Further Thoughts on Valuation

Brazil

StoneCo Ltd. is a Brazilian financial technology and software solutions provider. The company offers a cloud-based platform for payments, digital banking, and credit solutions primarily to micro, small, and medium businesses (MSMBs). It also provides Point of Sale (POS) and Enterprise Resource Planning (ERP) solutions. Headquartered in George Town, Cayman Islands, StoneCo was founded in 2012.

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StoneCo (STNE US)

Brazil Fintech: New Cap on Card Interchange Fees, Nubank and Inter Look Most Exposed

Regulatory pressure, due to the interchange fee cap, worsens the revenue outlook for Nubank especially, as well as that of Inter; we see...

Victor Galliano

Payments Companies – Our Core Picks

From our review of ten payments companies, we pick PagSeguro and Cielo as buys; we would take profits on recently listed DLocal and Square; other...

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

PicPay Pre-IPO Revisited – Further Thoughts on Valuation

PicPay's IPO valuation ranges from USD2.07bn to USD2.53bn, with credit quality as a key concern; we see Banco Pan as its key comparable, and...

Victor Galliano

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Brazil Fintech: New Cap on Card Interchange Fees, Nubank and Inter Look Most Exposed

Regulatory pressure, due to the interchange fee cap, worsens the revenue outlook for Nubank especially, as well as that of Inter; we see...

Victor Galliano

Payments Companies – Our Core Picks

From our review of ten payments companies, we pick PagSeguro and Cielo as buys; we would take profits on recently listed DLocal and Square; other...

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

PicPay Pre-IPO Revisited – Further Thoughts on Valuation

​PicPay's IPO valuation ranges from USD2.07bn to USD2.53bn, with credit quality as a key concern; we see Banco Pan as its key comparable, and...

Victor Galliano

PicPay's IPO valuation ranges from USD2.07bn to USD2.53bn, with credit quality as a key concern; we see Banco Pan as its key comparable, and...