PagSeguro Digital Ltd.

PagSeguro Digital Ltd NYSE: PAGS) is a corporation that provides financial technology solutions. In Brazil, the company focuses mostly on micro-merchants, small businesses, and medium-sized businesses. The Company provides a variety of digital payment options, as well as in-person payments through POS equipment that we provide to customers, free digital accounts, and account balance withdrawals.

PAGS Details

Latest News

• On Wednesday, June 08, 2022, after market close, PagBank PagSeguro revealed its financial results for the first quarter of 2022, and had a conference call and earnings webcast on the same day at 02:00 pm PDT.
• PagSeguro Digital Ltd. announced on January 10, 2022, that Chief Operating Officer Alexandre Magnani has been named co-Chief Executive Officer (co-CEO) of the firm by PagSeguro's Board of Directors.

Key Takeaways from Q1 FY22 financial results

• Total Revenue increased by 66% to BRL 3,427 million in Q1FY22, compared to BRL 2,067 million in Q1FY21, as detailed below:
• Transaction Activities and Other Services revenues increased by BRL 670 million, or 48 percent, in the first quarter of 2022, to BRL 2,054 million Q1FY21.
• Financial Income increased by BRL 674 million, or 103 percent, to BRL 1,331 million, which comprises the discount fees the company withholds from credit card transactions in installments for early settlement of accounts receivable.
• Other Financial Income increased by BRL 16 million, or 65 percent, to BRL 42 million in the first quarter of 2022, up from BRL 25 million in the previous quarter.
• Adjusted EBITDA was BRL 665 million in Q1FY22, up +16 percent from BRL 573 million in Q1FY21, owing to PAGS repricing throughout the quarter, operating leverage improvements on HUBs operations, and marketing investments.
• In non-GAAP terms, net income for the quarter was BRL 371 million, up from BRL 327 million in Q1FY21, reflecting the PAGS repricing process and operating leverage improvements on HUBs operations and Marketing Investments.
• Cash and Cash Equivalents were BRL 1,794 million at the start of the three months ended March 31, 2022, and BRL 1,483 million at the end of the period, a decrease of BRL 311 million, primarily due to additional POS purchases to improve inventory coverage ratios and avoid a potential new shortage of semiconductors due to lockdowns in some geographies.

Key Risk

• Supplier Concentration Risk: PAGS relies on a few suppliers for critical manufacturing equipment used to create point-of-sale (POS) devices. Furthermore, most of the point-of-sale equipment is built and tested by a single company. As a result, any violation of the contract by a vendor might put the company's activities on hold for a long time.

Outlook

For Q2FY22, the company expects the revenues in the ballpark of BRL 3.5 billion to BRL3.6 billion, while TPV is around BRL 84 to BRL85 billion. Non-GAAP net income is expected to be higher than Q1, with the range of around BRL 370 to BRL380 million.

Valuation Methodology: Price/Earnings Per Share Multiple - based Relative Valuation

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation

Over the past nine months, PAGS's share price has corrected by 77.23%. The stock is currently leaning towards the lower end of its 52-week range of USD 9.53 to USD 61.65. We have valued the stock using the Price/ Earnings Per Share multiple-based relative valuation method and arrived at a target price of USD 12.76. The decline on June 09, 2022, was merely because expectations of the market were higher than the already higher announced top-line results, which we expect to be covered sooner because of strong fundamentals. We believe that the company is trading at a discount from its peer's average but considering strong fundamentals, and better profitability metrics compared to the industrial average, gives bullish estimates for the upcoming near future.

Considering the better profitability ratios and leverage, robust top-line results, associated risks, positive outlook, and current valuation, we give a "Speculative Buy" recommendation on the stock at the closing price of USD 12.38 down 5.57% as of June 10, 2022.

1- Year Technical Chart, as of June 10, 2022. Data Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary:

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Note 3: The report publishing date is as per the Pacific Time Zone.