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 Capital Markets

<ul>
<li>In the follow-on issue, the primary portion announced by <a href="https://www.smartkarma.com/entities/xp-inc" target="_blank" data-smartkarma-citation="entities:28619:1" rel="noopener">XP Inc (XP US)</a>  is small relative to its current market value (c 1.5%), but coupled with the Itaú partial disposal of a maximum 4.3% stake in XP, it creates a clear share over-hang</li>
<li>In addition, <a href="https://www.smartkarma.com/entities/itau-unibanco-holding-sa-9d47d196-e503-471b-a84e-ca4401033062" target="_blank" data-smartkarma-citation="entities:24550:1" rel="noopener">Itau Unibanco Holding Sa (ITUB4 BZ)</a>’s spin-off of its remaining stake in XP (c 41.2% post follow-on) into single-purpose company named NewCo was approved by its board on 26<sup>th</sup> November, and shares in the forthcoming NewCo are exempt from any lock-up agreement</li>
<li>HoldCo <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> will become a large shareholder in XP post Itaú Unibanco’s spin-off, and although it has stated that it does not intend to dispose of its stake in the short term, Itausa does not consider the XP stake as a long term, strategic holding</li>
<li>The spin-off, lack of lock-up for spun-off shares and Itausa’s non-strategic classification of its XP holding creates further medium term over-hang for XP shares, in our view, post the follow-on issue; add to this the challenging fundamental outlook (especially related to the IFA “arms race”) and XP’s demanding valuations, it all contributes to our caution on XP shares</li>
<li>We prefer indirect, and diluted, exposure through holdco Itausa, in which we estimate Itausa will have an 15.6% economic stake in XP post follow-on issue and NewCo formation</li>
<li>Risks to our view include better than expected fundamental performance by XP, and less than expected pressure on costs related to incentives for IFAs, which would continue to drive premium growth and justify the premium multiples, and smaller than expected secondary share offerings in XP over the medium term</li>
</ul>


In the follow-on issue, the primary portion announced by XP Inc (XP US)  is small relative to its current market value (c 1.5%), but coupled with the Itaú partial disposal of a maximum 4.3% stake in XP, it creates a clear share over-hang
In addition, Itau Unibanco Holding Sa (ITUB4 BZ)’s spin-off of its remaining stake in XP (c 41.2% post follow-on) into single-purpose company named NewCo was approved by its board on 26th November, and shares in the forthcoming NewCo are exempt from any lock-up agreement
HoldCo Itausa-Investimentos Itau-Pr (ITSA4 BZ) will become a large shareholder in XP post Itaú Unibanco’s spin-off, and although it has stated that it does not intend to dispose of its stake in the short term, Itausa does not consider the XP stake as a long term, strategic holding
The spin-off, lack of lock-up for spun-off shares and Itausa’s non-strategic classification of its XP holding creates further medium term over-hang for XP shares, in our view, post the follow-on issue; add to this the challenging fundamental outlook (especially related to the IFA “arms race”) and XP’s demanding valuations, it all contributes to our caution on XP shares
We prefer indirect, and diluted, exposure through holdco Itausa, in which we estimate Itausa will have an 15.6% economic stake in XP post follow-on issue and NewCo formation
Risks to our view include better than expected fundamental performance by XP, and less than expected pressure on costs related to incentives for IFAs, which would continue to drive premium growth and justify the premium multiples, and smaller than expected secondary share offerings in XP over the medium term


XP (XP US) Follow-On Issue Highlights Over-Hang, Potential for More Share Sales Post Itaú Spin-Off

Equity Bottom-Up

<ul>
<li>We believe that 2021 and 2022 consensus EBITDA and net earnings estimates for <a href="https://www.smartkarma.com/entities/xp-inc" target="_blank" data-smartkarma-citation="entities:28619:1" rel="noopener">XP Inc (XP US)</a> are too aggressive</li>
<li>XP’s “investment” in the IFA network is set to continue into 2021, in our view, to counter growing competition, largely from BTG Pactual where an IFA “arms race” seems to be brewing</li>
<li>XP’s September announcement to eliminate trading fees at Rico and to sharply reduced them at XP direct, although barely expected to impact revenue, is a sign of greater competitive pressures, mainly from other digital players</li>
<li>There is a cost outlay to broaden out XP’s suite of financial products, like credit cards, that will add to opex in 2021</li>
<li>We still expect XP to deliver strong growth, but based on our CAGR for EBITDA and net earnings, the EVG of 1.16x and PEG ratio of 1.84x look stretched</li>
<li>In addition, there is the stock overhang from <a href="https://www.smartkarma.com/entities/itau-unibanco-holding-sa-9d47d196-e503-471b-a84e-ca4401033062" target="_blank" data-smartkarma-citation="entities:24550:1" rel="noopener">Itau Unibanco Holding Sa (ITUB4 BZ)</a>’s planned disposal of a 5% stake in XP, as well as the potential rotation from tech to value that could pressure XP’s premium multiples</li>
<li>Risks to our bearish view on XP include stronger than expected asset inflows, successful opex control and a rebound in the take rate from retail operations</li>
</ul>


We believe that 2021 and 2022 consensus EBITDA and net earnings estimates for XP Inc (XP US) are too aggressive
XP’s “investment” in the IFA network is set to continue into 2021, in our view, to counter growing competition, largely from BTG Pactual where an IFA “arms race” seems to be brewing
XP’s September announcement to eliminate trading fees at Rico and to sharply reduced them at XP direct, although barely expected to impact revenue, is a sign of greater competitive pressures, mainly from other digital players
There is a cost outlay to broaden out XP’s suite of financial products, like credit cards, that will add to opex in 2021
We still expect XP to deliver strong growth, but based on our CAGR for EBITDA and net earnings, the EVG of 1.16x and PEG ratio of 1.84x look stretched
In addition, there is the stock overhang from Itau Unibanco Holding Sa (ITUB4 BZ)’s planned disposal of a 5% stake in XP, as well as the potential rotation from tech to value that could pressure XP’s premium multiples
Risks to our bearish view on XP include stronger than expected asset inflows, successful opex control and a rebound in the take rate from retail operations


XP (XP US): Competition Headwinds to Persist

Event-Driven

<ul>
<li>
<a href="https://www.smartkarma.com/entities/itau-unibanco-holding-sa-9d47d196-e503-471b-a84e-ca4401033062" target="_blank" data-smartkarma-citation="entities:24550:1" rel="noopener">Itau Unibanco Holding Sa (ITUB4 BZ)</a> is to restructure most of its holding in <a href="https://www.smartkarma.com/entities/xp-inc" target="_blank" data-smartkarma-citation="entities:28619:1" rel="noopener">XP Inc (XP US)</a>, NASDAQ listed fintech, via spin-off</li>
<li>Itaú registered positive 3Q20 results; Itaú also plans to dispose of a 5% stake in XP, which should bolster core capital ratios</li>
<li>We had been cautious on <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>, but we now identify it as an attractive vehicle through which to play its main holding in Itaú Unibanco and the XP spin-off</li>
<li>The XP spin-off – NewCo – which is expected to take place in 1Q21, will be listed on Bovespa, giving NewCo shareholders market liquidity</li>
<li>We estimate that Itausa’s NAV discount has widened to 24%, which is attractive versus its NAV discount history</li>
<li>We also believe the NAV discount should narrow structurally, as the listed NewCo will provide Itausa with (potentially discounted) exposure to a listed FinTech vehicle, along with the scope for dividend recovery at Itaú Unibanco</li>
<li>In essence, we expect shareholder value creation from the XP stake spin-off for both Itaú Unibanco but also for the discounted holding Itausa</li>
<li>Risks include delays and in the extreme the suspension of the XP NewCo spin-off, and the potential for worse than expected fundamental performance at Itausa’s core holding, Itaú Unibanco</li>
</ul>



Itau Unibanco Holding Sa (ITUB4 BZ) is to restructure most of its holding in XP Inc (XP US), NASDAQ listed fintech, via spin-off
Itaú registered positive 3Q20 results; Itaú also plans to dispose of a 5% stake in XP, which should bolster core capital ratios
We had been cautious on Itausa-Investimentos Itau-Pr (ITSA4 BZ), but we now identify it as an attractive vehicle through which to play its main holding in Itaú Unibanco and the XP spin-off
The XP spin-off – NewCo – which is expected to take place in 1Q21, will be listed on Bovespa, giving NewCo shareholders market liquidity
We estimate that Itausa’s NAV discount has widened to 24%, which is attractive versus its NAV discount history
We also believe the NAV discount should narrow structurally, as the listed NewCo will provide Itausa with (potentially discounted) exposure to a listed FinTech vehicle, along with the scope for dividend recovery at Itaú Unibanco
In essence, we expect shareholder value creation from the XP stake spin-off for both Itaú Unibanco but also for the discounted holding Itausa
Risks include delays and in the extreme the suspension of the XP NewCo spin-off, and the potential for worse than expected fundamental performance at Itausa’s core holding, Itaú Unibanco


Itausa (ITSA4 BZ): Discounted Access to Itaú Unibanco, and Potentially to the XP Holding Spin-Off

<ul>
<li>
<a href="https://www.smartkarma.com/entities/ant-financial-services-group" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Group (6688 HK)</a> has priced above the initial market capitalisation range of USD200 to USD300bn, at USD317bn including its over-allotment option of shares</li>
<li>Ant’s IPO valuation reflects the assumptions in our ambitious scenario SOTP valuation</li>
<li>Based on earnings and EBITDA multiples, Ant Group looks attractive relative to payments companies and fast growth investment and wealth managers</li>
<li>Ant is at a slight discount to the China MegaTech comparables, and we believe that it warrants a premium valuation to its China peers</li>
<li>Ant’s premium growth potential in digital finance, leveraging off its leading digital payments footprint, indicates further upside potential to the shares post IPO, in our view</li>
<li>Risks to our positive view on Ant Group include increased regulatory restrictions in China, heightened geopolitical tensions impacting demand for the shares at IPO and weaker than expected GDP growth limiting growth potential, especially in China</li>
</ul>



Ant Group (6688 HK) has priced above the initial market capitalisation range of USD200 to USD300bn, at USD317bn including its over-allotment option of shares
Ant’s IPO valuation reflects the assumptions in our ambitious scenario SOTP valuation
Based on earnings and EBITDA multiples, Ant Group looks attractive relative to payments companies and fast growth investment and wealth managers
Ant is at a slight discount to the China MegaTech comparables, and we believe that it warrants a premium valuation to its China peers
Ant’s premium growth potential in digital finance, leveraging off its leading digital payments footprint, indicates further upside potential to the shares post IPO, in our view
Risks to our positive view on Ant Group include increased regulatory restrictions in China, heightened geopolitical tensions impacting demand for the shares at IPO and weaker than expected GDP growth limiting growth potential, especially in China


Ant Group (6688 HK): IPO Pricing Warrants a Re-Rating

<ul>
<li>We revisit our Ant Group SOTP valuation from August in this report, updating the changes in the market valuations of comparable entities, in each of Ant’s key divisions</li>
<li>We also change our valuation comparables for Ant’s CreditTech division to other Chinese CreditTechs, from the commercial banks previously used in the August report</li>
<li>The breakdown of divisional valuations, relative to our August valuation, has resulted in a shift away from Payments and InvestmentTech, and is now more in favour of CreditTech, where we see “Big Data” enhancing its value</li>
<li>Our SOTP post-money equity valuations, under three scenarios, range from a conservative USD215bn to an ambitious USD300bn, with a base case valuation of USD260bn</li>
<li>The SOTP valuations “sanity check” versus our earnings forecasts are reassuring, with attractive valuations for the base case versus global payments companies and China MegaTechs</li>
<li>Risks to our constructive view on the Ant Group valuation scenarios include increased US-China geo-political tensions leading to increased government action against Chinese payments apps and these tensions adversely impacting the appetite of US based funds at IPO, especially public sector pension funds</li>
</ul>


We revisit our Ant Group SOTP valuation from August in this report, updating the changes in the market valuations of comparable entities, in each of Ant’s key divisions
We also change our valuation comparables for Ant’s CreditTech division to other Chinese CreditTechs, from the commercial banks previously used in the August report
The breakdown of divisional valuations, relative to our August valuation, has resulted in a shift away from Payments and InvestmentTech, and is now more in favour of CreditTech, where we see “Big Data” enhancing its value
Our SOTP post-money equity valuations, under three scenarios, range from a conservative USD215bn to an ambitious USD300bn, with a base case valuation of USD260bn
The SOTP valuations “sanity check” versus our earnings forecasts are reassuring, with attractive valuations for the base case versus global payments companies and China MegaTechs
Risks to our constructive view on the Ant Group valuation scenarios include increased US-China geo-political tensions leading to increased government action against Chinese payments apps and these tensions adversely impacting the appetite of US based funds at IPO, especially public sector pension funds


Ant Group: SOTP Valuation Scenarios Revisited

Brazil

XP Inc. operates as a technology-driven financial services platform primarily in Brazil, offering a wide array of financial products and services. The company provides financial advisory services and an open financial product platform, giving clients access to investments such as equities, fixed-income securities, mutual funds, hedge funds, private equity funds, derivatives, credit cards, and loans. XP Inc. also offers wealth management services and financial education courses. The company was founded in 2001 and is headquartered in São Paulo, Brazil.

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XP (XP US)

XP (XP US): Competition Headwinds to Persist

Brazil fintech XP is in an IFA "arms race" with brokerage competitors that threatens its premium EBITDA growth and its stretched multiples; also...

Victor Galliano

Itausa (ITSA4 BZ): Discounted Access to Itaú Unibanco, and Potentially to the XP Holding Spin-Off

Our prior caution on Itausa has turned to enthusiasm; Itausa gives investors discounted access, at a 24% discount to the NAV, to Itau Unibanco and...

Victor Galliano

Ant Group (6688 HK): IPO Pricing Warrants a Re-Rating

Ant Group's share price at IPO is above the original expected range; still, we expect solid share re-rating potential given its growth prospects...

Victor Galliano

Ant Group: SOTP Valuation Scenarios Revisited

Our updated SOTP valuation for Ant Group is an essential divisional yardstick by which to assess valuation pre-IPO, with our proprietary estimates...

Victor Galliano

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

XP (XP US) Follow-On Issue Highlights Over-Hang, Potential for More Share Sales Post Itaú Spin-Off

Post XP's follow-on, we see the spin-off, lack of lock-up for spun-off shares and Itausa’s non-strategic view of its XP shares adding to risk of...

Victor Galliano

XP (XP US): Competition Headwinds to Persist

Brazil fintech XP is in an IFA "arms race" with brokerage competitors that threatens its premium EBITDA growth and its stretched multiples; also...

Victor Galliano

Itausa (ITSA4 BZ): Discounted Access to Itaú Unibanco, and Potentially to the XP Holding Spin-Off

Our prior caution on Itausa has turned to enthusiasm; Itausa gives investors discounted access, at a 24% discount to the NAV, to Itau Unibanco and...

Victor Galliano

Ant Group (6688 HK): IPO Pricing Warrants a Re-Rating

Ant Group's share price at IPO is above the original expected range; still, we expect solid share re-rating potential given its growth prospects...

Victor Galliano

Ant Group: SOTP Valuation Scenarios Revisited

Our updated SOTP valuation for Ant Group is an essential divisional yardstick by which to assess valuation pre-IPO, with our proprietary estimates...

Victor Galliano