Brazilian Payments: Guggenheim Takes Neutral Stance On Cielo, PagSeguro

Brazil’s regulator of the payments industry has been focusing on increasing competition in the space.

Cielo S.A. CIOXY and PagSeguro Digital Ltd PAGS are now facing a tough competitive environment, according to Guggenheim.

The Analyst

Analyst Jeff Cantwell initiated coverage of both Cielo and PagSeguro with Neutral ratings.

The Thesis

Cielo is the largest acquirer and PagSeguro is among the fastest-growing acquirers in Brazil and both companies could significantly impact growth in Brazil’s electronic payments industry, Cantwell said in the Tuesday initiation notes. 

Checks indicate rising consumer confidence and spending that are coming along with an improvement in Brazil’s economic outlook, the analyst said, adding that this could boost volumes in the payments industry in the back half of 2019.

Cielo’s large size means its planned strategic transformation is taking time, Cantwell said. This could continue to exert pressure on the company’s revenue through 2019, with contracting and a shift away from larger merchants taking place, he said. 

Stiffening competition could also impact Cielo’s margins, the analyst said. 

Guggenheim projects a 200-basis point contraction in EBITDA margins and 10-percent decline in EPS in 2019.

PagSeguro offers merchants high-quality payment acceptance capabilities and unique value-added services, Cantwell said.

These factors could result in share gains for the company over the next couple of years, and its market share is expected to expand to 10 percent by the end of 2020, he said. 

Competitor initiatives could restrict PagSeguro’s ability to add new micro-merchants over time, which will in turn impact the company’s EPS growth, the analyst said.

PagSeguro’s performance in POS pricing and MDRs could be adversely impacted in the medium term by the strategic initiatives of companies like Cielo, according to Guggenheim. 

Price Action

Cielo was trading up 2.23 percent at $2.75 before the close Wednesday, while PagSeguro was up 1.73 percent at $22.02. 

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