PagSeguro Stock: Digital banking on the rise (NYSE: PAGS)

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As the 5th largest merchant acquirer in Brazil, PagSeguro Digital Ltd. (NYSE: PAGS) diversified into digital banking in 2019 with the launch of PagBank. It has experienced strong growth in customer and transaction volume and has become the second largest digital banking application in Brazil. Thus, we analyzed its opportunity for revenue growth based on its growing customer base and growth in transaction volume to determine the potential revenue contribution to the business.

Customer Growth

PagBank customers

2020

2021

2022F

2023F

2024F

2025F

2026F

Active PagBank customers

7.9

13.1

18.3

23.5

28.7

33.9

39.1

Growth %

65.8%

39.7%

28.4%

22.1%

18.1%

15.3%

Source: Pag SeguroKhaveen Investments

Since its launch in 2019, PagBank has grown its user base to become the second largest digital bank behind Nubank with 13.1 million active users at a growth rate of 65.8% YoY in 2021. first quarter of 2022, the company’s active user base grew 57% year-on-year. at 14.3 million. According to Similarweb, PagBank was ranked second digital banking app (excluding incumbent financial institutions) in terms of usage behind Nubank. Based on Sensor Tower, PagBank tied with C6 and Inter with an estimated 1 million monthly downloads, behind Nubank at 3 million downloads on Google Play. In March 2022, based on its annual report, its app had the highest average reviews of 4.8 stars compared to between 3.6 and 4.7 stars for its competitors.

According to a study by the Instituto Locomotiva, the unbanked population in Brazil was 34 million representing 21% of the population. Additionally, an average of 315,000 digital accounts opened per day in 2021 based on idwall. Additionally, she revealed that 60% of respondents had at least one digital account and 64% also had traditional bank accounts, but 75.8% indicated that they were ready to switch to a digital account.

Overall, as the second largest digital banking app by users in Brazil, we believe PagBank’s high monthly app downloads and highest average reviews support its growth opportunity to continue to meet the needs of the large population of its home market and we have forecasted its active customer growth through 2026 based on its additional average growth of 5.2 million customers per year in 2021 for a 5-year average growth rate by 24.7%.

Transaction volume growth

In addition to its solid customer growth, the company also saw strong transaction volume growth at 191.6% in 2021. This is driven by its growth in total payment volume (TPV) per active user of 75.8 % YoY at BRL 15,580. Previously, in 2021, the company highlighted its expansion of the PagBank ecosystem with the launch of additional features and partnerships.

We launched additional features to improve our ecosystems, such as investments, insurance, marketplace and other partnerships. We have become a complete bank offering the best UX for consumers, micro-merchants and SMEs in Brazil. – Ricardo Dutra, Co-General Manager

For example, the company had launched its PagInvest service within its app which has 1.3 million customers in 2021 and has seen an average inflow per customer growth of 87% year-over-year. Additionally, the company had entered into partnerships with merchants to offer rewards and incentives such as cashback to PagBank users who pay through the app.

PagBank customers

2020

2021

2022E

2023F

2024F

2025F

2026F

PagBank POS per user

8,861

15,580

24,367

35,674

48,659

61,505

71,592

Growth %

75.8%

56.4%

46.4%

36.4%

26.4%

16.4%

PagBank TPV (BRL billion)

70

204.1

446

838

1,397

2,085

2,799

Growth %

191.6%

118.5%

88.0%

66.6%

49.3%

34.3%

Source: PagSeguro, Khaveen Investments

Overall, we believe the company’s focus on expanding its PagBank features such as PagInvest and merchant partnerships could support its trading volume through increased consumer engagement. Thus, we have projected growth in its POS per user based on forecast neo-banking transaction volumes of 56.4% in 2022 according to Statista, but declining by 10% per year as a conservative estimate, this which translates to an average forecasted total transaction volume growth rate of 71.3. %.

Take the rate

Although the company’s PagBank transaction volume increased by 192% year-on-year in 2021, its PagBank revenue growth was only 50%, as its net draw rate decreased from 0.9% to 0. .44% according to our calculations (income as % of TPV). According to the management of its earnings briefing, this was attributed to the growth of its consumer customer base which had lower monetization than its merchant customers.

Cashing out takes a little longer. They don’t have auto cashout like you have for merchants. They don’t have the same amount of cash-in that we see at the merchant, which is why monetization takes a while. – Ricardo Dutra, Co-General Manager

PagBank customers

2020

2021

2022E

2023F

2024F

2025F

2026F

PagBank TPV (BRL billion)

70

204.1

446

838

1,397

2,085

2,799

Growth %

191.6%

118.5%

88.0%

66.6%

49.3%

34.3%

Take the rate

0.9%

0.44%

0.44%

0.76%

1.31%

2.25%

3.88%

PagBank Revenues (BRL Billions)

0.6

0.9

2.0

6.4

18.3

46.9

108.5

Growth %

50.0%

118.5%

223.7%

186.8%

157.1%

131.2%

Source: PagSeguro, Khaveen Investments

Moreover, in the first quarter of 2022, its underwriting rate declined further to 0.42%, which management attributed to the “macro scenario”. However, management also underlined its focus on expanding its revenue streams with the launch of new secured lending products in the second half of 2022. By comparison, market leader Nubank, with more than double its number of user accounts, had a take rate (revenue as % of purchase volumes) of 3.9% in 2021. Assuming PagBank’s take rate increases to 3.9%, this represents an opportunity to revenue of BRL 17.3 billion based on our projected 2022 TPV. base participation rate of Nubank at a CAGR of 72.2% from 2023 for an average total revenue growth of 163.5%.

Overall, we expect revenue growth from its PagBank segment to be driven by its take rate as the company introduces new products to increase the monetization of its transaction volumes and expect average growth in its revenues of 163.5% assuming its take rate reaches 3.9% on a Nubank basis by 2026.

Risk: Growing competition

According to the IDB, the number of fintech platforms on mobile apps that provide digital banking services in Latin America has increased by 114% to 60 in 2021. We believe this highlights the growing competitive rivalry that could be a threat to the company’s growth prospects.

Verdict

Revenue

2020

2021

2022E

2023F

2024F

2025F

2026F

Pag Seguro

6.1

9.4

12.4

16.4

21.7

28.6

37.8

Growth %

8.9%

54.1%

32.1%

32.1%

32.1%

32.1%

32.1%

PagBank

0.6

0.9

2.0

6.4

18.3

46.9

108.5

Growth %

100.0%

50.0%

118.5%

223.7%

186.8%

157.1%

131.2%

Other

0.1

0.1

0.1

0.1

0.1

0.1

0.1

Growth %

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Total

6.8

10.4

14.5

22.9

40.0

75.7

146.5

Growth %

52.9%

39.3%

57.9%

75.0%

89.0%

93.5%

Source: PagSeguro, Khaveen Investments

Overall, we expect growth in the Company’s PagBank segment to be driven by its strong customer growth at an expected average of 24.7% through 2026 as one of the banking apps digital downloads in Brazil and growth in transaction volume at an average of 71.3% with the expansion of its services and features on its application. Additionally, assuming its participation rate grows to 3.9% by 2026, we projected an average total revenue growth of 163.5%, higher than its PagSeguro segment (32.1%). and we expect the segment’s revenue contribution to exceed 50% by 2025. Overall, the company has an analyst consensus price target of $26.47, up 113%.

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