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>
<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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Thematic (Sector/Industry)

<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)

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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52-week Range

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