Secured Lending Focus And Ecosystem Expansion Will Strengthen Future Prospects

Key Takeaways

• Strategic growth in credit portfolio and effective repricing bolster income and profit amid Brazil's interest rate environment.
  
• Client engagement and buybacks enhance PagBank revenue and shareholder value through monetization and EPS growth.
  
• The company faces challenges from higher interest rates, competition from alternatives like PIX, and strategic risks from share buybacks impacting long-term growth and profitability.

Catalysts

Engages in the provision of financial and payment solutions for consumers, individual entrepreneurs, micro-merchants, and small and medium-sized companies in Brazil and internationally.

• PagSeguro's credit portfolio grew by 36% year-over-year, focusing on secured loans and a sustainable strategy, which should enhance net income growth through increased interest income from low-risk lending.
  
• Strong repricing strategies in response to the hiking interest rates in Brazil are expected to partly mitigate the impact on financial costs, contributing positively to gross profit and overall earnings.
  
• The expansion in client engagement and monetization across PagBank's banking and payment ecosystems is increasing revenue opportunities, which is expected to support revenue and profit growth.
  
• Lower cost of funding due to reduced average yield on deposits is anticipated to enhance net margins by improving financial cost efficiency.
  
• Execution of a significant buyback program is set to enhance EPS growth through reduced share count, thereby creating shareholder value.

PagSeguro Digital Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PagSeguro Digital's revenue will grow by 7.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.5% today to 11.9% in 3 years time.
• Analysts expect earnings to reach R$2.7 billion (and earnings per share of R$8.54) by about March 2028, up from R$2.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting R$3.0 billion in earnings, and the most bearish expecting R$2.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.1x on those 2028 earnings, up from 6.4x today. This future PE is lower than the current PE for the US Diversified Financial industry at 15.4x.
• Analysts expect the number of shares outstanding to decline by 4.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.19%, as per the Simply Wall St company report.

PagSeguro Digital Future Earnings Per Share Growth

Risks

• The company faces challenges from a higher SELIC rate than initially projected, which could impact the cost of funding and financial costs, potentially affecting overall net margins and profitability.
  
• There is a shift in the client and product mix and increasing competition from products like PIX that can lower transaction yields and affect potential revenue from transaction fees.
  
• The reliance on repricing strategies to mitigate higher interest rates could lead to client churn, especially if competitors do not follow suit, impacting the company's revenue growth and net income.
  
• While the company has significant exposure to secured loans, any delay in developing government-backed opportunities like the private payroll could hinder expected growth in the banking sector, impacting net revenue and earnings.
  
• The company is executing a substantial share buyback program, which, while enhancing EPS, may limit available capital for other strategic growth initiatives, potentially affecting long-term revenue and profit growth.

Valuation

• The analysts have a consensus price target of $10.693 for PagSeguro Digital based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $16.05, and the most bearish reporting a price target of just $5.08.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$22.7 billion, earnings will come to R$2.7 billion, and it would be trading on a PE ratio of 8.1x, assuming you use a discount rate of 11.2%.
• Given the current share price of $7.89, the analyst price target of $10.69 is 26.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.