PagSeguro: Gaining Market Share And Outpacing Industry TPV Growth

seekingalpha09-13

Despite robust growth in revenue and earnings re-acceleration, PagSeguro's stock remains sensitive to high-interest rates, currently at 10.5%, impacting the stock's sentiment.The company significantly...

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AsiaVision What Happened PagSeguro (NYSE:PAGS) has faced pressure on its upside momentum over the past month, despite 2Q FY2024 earnings beating both revenue and non-GAAP EPS estimates. While the company's growth is recovering, the stock sentiment remains sensitive to interest rates, which are currently on hold at 10.5%. In my previous analysis, I initiated a buy rating on the stock based on the potential for lower rates in Brazil. However, the stock has underperformed, as the current rate is significantly higher than the market anticipated. Although the fintech market in Brazil may be nearing saturation, I believe that gaining market share and enhancing profitability will generate significant value for shareholders. Furthermore, with the stock trading at 0.43x of non-GAAP PEG fwd, PAGS appears extremely undervalued given its 19% YoY revenue growth and 32% YoY non-GAAP EPS growth in 2Q. Moreover, the strong boost in FY2024 TPV guidance signals a robust revenue growth in 2H FY2024. As a result, I maintain my buy rating on the stock, considering PAGS a GARP opportunity with an attractive long-term risk-reward profile. A Big Boost on FY2024 TPV Outlook   The company model PAGS is gaining market share, supported by strong revenue growth re-acceleration. As shown in the chart, Total Payment Volume (TPV) growth bottomed out in 2Q FY2023 and has consistently rebounded over the past four quarters. TPV growth reached 34.2% YoY in 2Q FY2024, driven by nearly 50% YoY growth in LMEC TPV. According to Statista, total transaction value in Brazil is expected to grow at a CAGR of 10.5% from 2024 to 2028, implying that PAGS's TPV is significantly outpacing the industry average growth rate. During the 2Q FY2024 earnings call, the management mentioned PAGS's TPV growth in 2Q was 3 times higher than the industry's growth. While active merchants declined by 4.8%, the company attributed this to a reduction in 'nano-merchants'—those generating less than R$1K in TPV per month. PAGS is now focusing on medium and large enterprises, which should drive higher engagement and profitability. TPV per merchant grew by 42% YoY in 2Q FY2024, up from 35.2% YoY in 1Q. Additionally, PagBank Active Clients also showed a growth rebound to 3.9% YoY in 2Q, up from 2.6% YoY in the previous quarter. The company significantly raised its FY2024 TPV guidance from 12%-16% YoY to 22%-28% YoY, reflecting a 10% increase from its previous 1Q guidance. Despite a continued decline in its take rate, this revision indicates stronger demand for its merchant services, which supports a better-than-expected revenue growth outlook in 2H FY2024. High Interest Rate May Not Largely Impact Profitability   The company model While PAGS's transaction revenue has stabilized after a decline in FY2023, its growth trend is currently below the previous +30% YoY momentum, which may concern some investors. Nearly 50% of the company's revenue now comes from financial income, which has grown significantly over the past three quarters, reaching 32.5% YoY in 2Q FY2024. This segment has been a key growth driver for PAGS recently.   The company model Despite the prevailing 10.5% interest rate, the company’s financial income growth has outpaced its expenses, as financial expenses as a percentage of financial income dropped to 40.9% in 2Q FY2024. Although the current 10.5% rate is higher than previously expected, I believe PAGS can continue growing its deposits while further reducing this ratio, which should help improve its earnings outlook. It’s important to note that PAGS’s OCF in 2Q FY2024 was down by R$7 billion, primarily due to a R$10.67 billion increases in Accounts Receivable on its balance sheet. However, this big jump is expected to reverse and recover its OCF in 3Q FY2024, driven by early payments and receivables from other acquirers. Management highlighted that \"two-thirds of TPV in Brazil is conducted through credit, either with or without installments\". Early Sign of Margin Expansion Improves Profitability The company model PAGS's net margin saw a sharp decline in FY2021 as the Central Bank of Brazil (BCB) raised interest rates from 2% to 13.75% in less two years. With rates now down to 10.5%, I believe the worst of the interest expense headwinds are over. Additionally, the company has been managing its cost structure effectively, as evidenced by the lower financial expense as a percentage of financial income. Therefore, PAGS’s non-GAAP net income margin will continue to recover in the coming quarters, even if the interest rate remains at its current level. 2Q FY2024 Presentation The company provided guidance for lower D&A and POS write-offs in FY2024. Combined with a strong TPV outlook for 2H FY2024, the company modestly raised its non-GAAP net income growth guidance from 16%-22% YoY to 19%-25% YoY. It’s possible that strong TPV growth from LMEC is accompanied by lower margins from larger merchants, potentially impacting profitability. During the call, the management explained that a higher-than-expected interest rate will affect the company's financial expenses and its net income, as they do not believe the interest rate will come down anytime soon. However, as we previously discussed, this may not significantly impact earnings growth. Therefore, I believe that the company's non-GAAP net income guidance is conservative and beatable. Growth At a Cheap Price Seeking Alpha Recently, some sell-side analysts downgraded the stock due to concerns about market saturation in Brazil. However, as I previously mentioned, PAGS is gaining market share from competitors, even in a saturated market. Additionally, the company can shift its focus towards earnings growth and FCF generation. Despite the rebound in both top and bottom-line growth, we have not seen an expansion in its valuation multiples, reflecting market pessimism about PAGS's long-term growth outlook, particularly from transaction service revenue. The stock is currently trading at 8.7x of GAAP P/E TTM and 1.14x of GAAP P/B TTM. On a non-GAAP forward basis, its non-GAAP P/E fwd is currently at 7.5x, which is below 9.6x of StoneCo (STNE) and 35% below its sector average. PAGS seems undervalued, given that its TPV is growing 3 times faster than the industry average. If we also factor in its earnings growth potential, its non-GAAP PEG fwd sits at 0.43x, which is 65% below the sector average. Therefore, I believe PAGS is a high-quality value stock with above-average growth potential, deserving a higher valuation. The stock price should go higher from here over the long term. Conclusion  In summary, PAGS is a long-term value play as the market is underappreciating its potential for market share expansion, strong TPV growth outlook, and improving profitability. Despite concerns about high interest rates and fintech market saturation in Brazil, these factors are unlikely to impact its quality growth over the long term. Positioned for robust revenue and earnings growth in 2H FY2024, and trading at a significant discount relative to the broader sector, PAGS appears extremely undervalued. With a 7.5x non-GAAP P/E TTM and over 30% YoY earnings growth from the previous quarter, PAGS represents a \"high quality growth at a cheap price\" opportunity. Therefore, I reiterate my buy rating on the stock.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2467685748"}