PagSeguro jumps on better-than-expected Q1 profit forecast

PagSeguro Digital Ltd. jumped nearly 10% after reporting better than expected guidance for first-quarter profit.

The company estimates net income for the first quarter at between 360 million reais and 370 million reais, much better than expected by analysts. The company also estimated revenue for the first quarter of between 3.3 billion reais and 3.4 billion reais, up 60% to 64% from a year earlier, it said in a filing.

"Guidance still supports our view of a robust business at attractive valuation," a team of Credit Suisse analysts led by Daniel Federle wrote in a March 22 note.

PagSeguro and its peers including StoneCo Ltd. have seen shares plummet over the past year amid increasing competition and regulation. PagSeguro is down 67% from a high of nearly $61 on Aug. 27, while StoneCo has taken an even bigger hit, dropping almost 80% from a high of about $70 on June 24. However, StoneCo reported last week that it also projects higher-than-expected profit for the first quarter as it reins in a badly managed aggressive growth strategy. Shares of StoneCo and peers soared.

Like StoneCo, PagSeguro appears to be taking a more conservative approach. "Management cited that portfolio growth will focus on higher quality lines with collateral, given the now more adverse macro scenario in the first half of 2022," a team of Banco Itaú BBA analysts led by Pedro Leduc wrote in a March 22 note.

PagSeguro started raising prices in November in a trend that appears to have accelerated in January and February and is expected to cycle through to April, James Friedman, an analyst at Susquehanna Financial Group, said in a March 23 note. That said, "We are maintaining our positive rating but trimming our price target to $38 on a 13% 2022 margin (15% prior)."

Analysts from the HSBC Research division agreed, forecasting non-GAAP net income margin under pressure and declining to an estimated 9% in 2022 from 11% in 2021. Analysts led by Neha Agarwala wrote in a March 23 note that the margin squeeze will result from soaring financial expenses with rates rising higher than expected and credit revenue expected to grow slowly given the tough macro environment.

For the fourth quarter of 2021, the main positive surprise for analysts at JPMorgan came from net financial results. Investors had been concerned over spread compression driven by the fast-rising Selic interest rate, now at 11.75% up from a record low of 2% in 2020. PagSeguro reported 774 million reais in net financial results, virtually flat from the previous quarter and 25% above the bank's estimates.

As of March 22, US$1 was equivalent to 4.94 Brazilian reais.