PagSeguro's Brazil Opportunity Is 'Compelling,' KeyBanc Says In Bullish Initiation

PagSeguro Digital Ltd PAGS, a Brazil-based mobile payment provider that focuses mostly on micro-merchants, small- and medium-sized companies, faces a "compelling" opportunity in its home market, according to KeyBanc Capital Markets. 

The Analyst

KeyBanc Capital Markets' Josh Beck initiated coverage of PagSeguro Digital with an Overweight rating and $42 price target.

The Thesis

PagSeguro built a strong brand in the Brazil market that's disruptive in nature, transparent and feature-rich, with a low-cost business model, Beck said in the Friday initiation note.

While competition is always a concern, the company holds a strong position in Brazil's digital payment space — a $400-billion market that's less than 30-percent penetrated and growing at a compounded annual growth rate of 14 percent, the analyst said. 

The company is likely to benefit from favorable shifts in consumer preferences, as merchants and consumers in Brazil are "significantly undeserved," Beck said. PagSeguro's offering of credit card installments and advance funding account for a significant portion of its business, at around 53 percent of total revenue, he said. 

PagSeguro is likely to see a 43-percent adjusted revenue compounded annual growth rate through 2019 and 26-percent adjusted EBITDA margin expansion to 57 percent, Beck said.

The company faces additional potential drivers of incremental upside from the following, according to KeyBanc:

• Merchant growth.
• Up-market expansions.
• Efficiencies in operating expenditure.
• New merchant service launches.
• A potential consumer digital wallet.

KeyBanc's $42 price target is based on a 14.3x multiple on 2019E EV/EBITDA, which is a premium to its current multiple of 12x, below network peers of 17-20x and "well below" many fintech names at 17x to 42x, Beck said. 

Price Action

Shares of PagSeguro Digital were trading flat early Friday morning.

Related Links:

Morgan Stanley, BofA Positive On Pagseguro, Brazil's 'Square With A Twist'

Susquehanna: Brazilian Payment Processor PagSeguro Likely to Sustain 'Hypergrowth'