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Guggenheim Securities launches Cielo, PagSeguro coverage

Guggenheim Securities LLC analyst Jeff Cantwell initiated coverage of Brazil-based payments companies Cielo SA and PagSeguro Digital Ltd. with a "neutral" rating. Cantwell did not assign a price target for the companies.

"Cielo and PagSeguro are two important payments companies in Brazil, and we expect both will significantly impact the future growth of electronic payments in the country," Cantwell said.

The analyst forecasts a 10% year-over-year decline in Cielo's EPS in 2019, given "declining revenue and margin compression" amid "a challenging operating environment" due to "a combination of regulatory-related and competitive headwinds." The analyst also expects Cielo's revenue to narrow 3% and its EBITDA margins to drop by 200 basis points to 39%.

Cantwell's expectation for 2020 "looks slightly better" with a 1% year-over-year EPS growth, as Cielo's initiatives lead to an increase in its merchant base and "greater volume and revenue expansion."

The analyst sees Cielo's active merchant base picking up in early 2019, with volume growth of 7%/8% in the latter half of the year. Due to greater competition, "Cielo increasingly offers merchants value-added services like market intelligence tools, data analytics, and inventory management" and "is also reducing its pricing for its POS systems and shifting towards the sale, rather than rental, of those systems — similar to its competitors," the analyst said.

Meanwhile, Cantwell expects EPS growth of 33% and 29% for PagSeguro in 2019 and 2020, below the 43% and 26% consensus. The analyst sees PagSeguro "as a share gainer in acquiring over the next two years due to the quality of its platform," with its market share expected to approach 10% by the end of 2020.

However, PagSeguro's EPS growth faces emerging headwinds, including "competitors' increased focus on acquiring micro-merchants" and "strategic initiatives by incumbents like Cielo" which pose "[medium-term] headwinds to PagSeguro's POS pricing and MDRs."

Cantwell gave a "mixed" outlook for Brazilian acquirers, highlighting positive factors such as increasing card usage and improvement in the country's economy. However, he expects a tough competitive environment and potential regulatory changes to take a toll on acquirers' metrics.