PagSeguro Inventory: Bullish On Brazil Digital Banking Momentum (NYSE:PAGS)

PagSeguro Digital Ltd (NYSE:PAGS) is a fintech chief in Brazil benefiting from robust momentum in its digital banking platform and funds options. The corporate simply reported its newest quarterly outcome which capped off a formidable 2021 regardless of pandemic disruptions.

To get a way of the developments, the corporate’s banking unit added a median of 24k new accounts per workday final 12 months driving the full funds quantity to just about double from 2020. Whereas shares have been extremely risky amid the market selloff, we’re bullish on PAGS which is supported by strong fundamentals and a constructive long-term outlook. The corporate is worthwhile and a great way to seize publicity to the high-growth alternative of digital monetary companies within the Brazilian economic system.

PAGS Earnings Recap

The corporate reported its This fall earnings on March twenty second with non-GAAP EPS of BRL 1.28, representing roughly $0.26 at a present change price of BRL 5 per USD. Income of BRL 3.2 billion, or ~$640 million, climbed 55.0% 12 months over 12 months. The adjusted EBITDA at BRL 751 million elevated by 3.4% y/y reflecting a softer margin contemplating investments and promoting bills associated to consumer acquisition. Nonetheless, for the complete 12 months, complete funds quantity (TPV) at BRL 456 billion was 97% greater than 2020 whereas complete income elevated by 53% to BRL 10.4 billion. 2021 EPS at BRL 4.68 climbed 12% y/y.

A key level right here is that the corporate has two key working segments between “PagSeguro” which is the core funds and service provider level of sale options operation that at present represents 90% of complete revenues. PagSeguro TPV climbed 56% y/y supporting a 53% improve in section income.

However, what is probably going extra thrilling is the traction within the “PagBank” group which relies on a free digital banking account. PagBank presents shoppers instruments like invoice funds, wires, and peer-to-peer transfers. Retailers on the platform get entry to money advances on receivables as a significant promoting level. PagBank TPV climbed 191% y/y driving a 63% improve in income in 2021. The variety of PagBank energetic purchasers at 13.1 million, climbed 66% y/y with the corporate noting that PagBank is the principle financial institution for practically 50% of customers.

An vital metric for the corporate is its internet take price which displays the monetizable share of the TPV. For the PagBank section, the online take price reached 1.44%, up from 1.35% in 2020. A precedence for the corporate in 2022 is to maneuver “upmarket” by focusing on bigger small companies. PagSeguro additionally intends to increase its collateralized credit score choices which may work so as to add profitability.

By way of the steerage, the administration highlighted that developments have been robust this 12 months with knowledge via February. For Q1, the corporate expects to generate complete income progress between 60% and 64% in comparison with the interval final 12 months. The Q1 non-GAAP internet revenue estimate midpoint of BRL 365 million, if confirmed, would characterize a rise of 12% from BRL 327 million in Q1 2021. For the complete 12 months 2022, whereas administration is just not offering particular targets, the messaging is for continued momentum and firming margins by specializing in operational efficiencies.

Lastly, the corporate ended the 12 months with BRL 1.8 billion in money and equivalents towards BRL 1 billion in debt. We view the online money place on the stability sheet and in any other case strong liquidity as a robust level within the firm’s funding profile.

Is PAGS A Good Lengthy-Time period Funding?

From a excessive degree, probably the most favorable dynamic for PagSeguro is its consolidating market place in Brazil, a rustic with a inhabitants of over 200 million individuals. A rising center class with increasing entry to cell web in what stays underpenetrated banking sector represents a robust elementary tailwind.

It is telling that the iShares MSCI Brazil ETF (EWZ) has gained momentum in 2022, climbing by greater than 30% this 12 months already in comparison with a 6% decline within the S&P 500 (SPY). There’s constructive momentum within the economic system this 12 months amid the present macro surroundings outlined by robust commodity pricing throughout power and supplies. The setup is constructive for financial exercise within the area which can also be mirrored in a strengthening Brazilian Actual forex. The purpose right here is to say that PagSeguro advantages from these developments which assist a constructive working backdrop.

Going again to the robust consumer progress noticed within the digital financial institution and core funds platform, the developments assist a runway for progress contemplating all of the ancillary income and cross-selling alternatives. A consumer might join the free on-line checking account however later add on companies. On this level, PagSeguro’s “PagInvest” buying and selling and brokerage platform gained momentum in 2021 and highlights the completely different instructions the corporate can take to monetize customers by offering a precious service inside the ecosystem. We consider this technique can work.

Whereas PAGS is just not the one participant amongst Brazilian fintech, its distinction is that the corporate is probably the most worthwhile inside the funds section in comparison with Cielo SA (OTCPK:CIOXY) and StoneCo Ltd (STNE) by way of its internet revenue yield on TPV. The corporate additionally highlights the way it’s nonetheless smaller than the established conventional banks like Bradesco SA (BBD) and Itau Unibanco Holding SA (ITUB) by way of the typical income per consumer. The upside right here is the potential that this metric converges greater over time producing important progress because it expands with extra monetary companies.

In line with consensus estimates, the market forecast is for PAGS income to climb 33% in 2022 whereas sustaining momentum with a 24% improve in 2023 and 23% in 2024. Earnings are additionally anticipated to speed up over the following 2 years. We see up upside to those estimates which can show to be conservative as a part of the bullish case for the inventory. Contemplating the present 2022 EPS estimate of $1.04, PAGS is buying and selling at a ahead P/E of round 19x on the present market value.

We talked about the opposite Brazilian fintech gamers like StoneCo Ltd (STNE) and Nu Holdings Ltd (NU). PAGS stands out as buying and selling at a decrease income a number of to each names and a reduction by way of the ahead P/E ratio. Recognizing every of those firms have their variations and give attention to various section, we view PAGS as providing a greater worth among the many group whereas nonetheless robust progress.

PAGS Inventory Worth Forecast

Shares of PAGS have been in a deep selloff since final October when it was buying and selling as excessive as $60. On the time, there was an unrelated headline-making “quick report” on the maker of the point-of-sale terminals PAGS commercializes. The selloff type of gained momentum following a weaker than anticipated Q3 report in November when PAGS administration guided for softer margins. The development decrease in latest months now coincides with the broader market weak point amongst “excessive progress tech names”.

Our take is that the most recent quarterly report was robust sufficient to offer shares of PAGS a brand new sense of momentum. Notably, the inventory at present buying and selling round $20 remains to be close to the bottom degree going again to the pandemic crash of 2020. It is honest to say that the autumn from the excessive has already priced in a few of the weaknesses and worst-case eventualities. The way in which we’re PAGS is that the present degree represents a lovely entry level for a high-quality firm at a reduction. From right here, we consider the mix of a pretty valuation and a extra constructive outlook can ship shares greater.

Is PAGS A Purchase, Promote, Or Maintain?

We price PAGS as a purchase with a value goal for the 12 months forward at $26.00 representing a 25x a number of on the present consensus 2022 EPS of $1.04. Our pondering right here is that the corporate’s valuation premium can converge greater in the direction of friends like StoneCo and Nu Holdings, which technically have greater progress though PAGS advantages from stronger financials. We’re bullish on the Brazilian economic system which ought to assist PAGS outperform expectations.

By way of dangers, the following few quarters might be vital to substantiate the working momentum and monetary developments. Weaker than anticipated outcomes or deterioration to the macro outlook can open to door for extra draw back within the inventory via a revision within the long-term earnings outlook. Monitoring factors going ahead embody the developments in consumer progress and the online take price.