Kora Management Files Q1 13F Form
Will $STNE be acquired?
Yesterday, we wrote about the rumors that BTG Pactual would be negotiating to buy $STNE.
Since Thursday, the market has been speculating that BTG Pactual and Stone would be negotiating an M&A — actually, BTG Pactual would be the buyer.
$STNE's gossip began in Dec of 2021 when the company hired $JPM to assess strategic options. In the local market, however, the gossip about $STNE looking for a potential buyer since March of 2021, when the company was supposedly negotiating with $XP.
As the deal didn't prevail, $STNE turned to Inter since both have an NDA agreement, but soon the sell-off began, and the deal was down. The market spreads the news that Stone has been negotiating with BTG Pactual, even though the deal would not be close to being concluded.
➡️What is in there for BTG Pactual?
Stone is one of the top five players in the industry, with a considerable capillarity, good tech resources for scaling its operations, and top-notch logistic capabilities.
Honestly, I believe that Andre Esteves (BTG Chairman) also observes that Andre Street ($STNE Chairman) is back. After losing money in its credit operation, local investors sold their shares quickly because of $STNE's naivety in jumping the gun, especially about lending in Bz.
Nevertheless, the market still has a high consideration for Street, so he returned and joined meetings with crucial investors. We believe Esteves knows that his name associated with Street's would restore investors’ confidence in mgnt and would use this to convince Street.
➡️What is in there for Stone?
Even though Stone isn't facing a liquidity issue, the company could use more resources to accelerate its strategy and resume its credit operation.
With BTG, $STNE could strengthen its position as a payment gateway for merchants using BTG's capital to leverage the existing operation. $STNE could leverage its platform to gain stickiness with its clients by offering complex products, such as lending, insurance, etc.
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I guess combining BTG's expertise in the credit business with Stone's capilarity and commercial strenght in BZ's SMB space would be a powerful mix for them to escalate the lending portfolio in this segment with both good pace and risk assessment. The deal would be a win-win in my view (even before considering the optionalities that would open up wiht both André's working together...)
According to our proprietary research and expert channel checks, instant payments can affect many use cases involving merchants and consumers.
In the past month, we heard over a dozen CFOs and Senior Product Managers trying to map where instant payment schemes could offer a threat to profit.
Our perception is that C-level management doesn’t see Pix as a core, and Product Executives are solely focused on implementation.
Even though we agree they should focus on their respective roles, we missed more granularity about the economic impact of Pix.
So, illustrated below, we set our war table for estimating where and by how much Pix and probably most instant payment schemes should affect profit pools.
Source: Giro Lino.
We built this table based on the available evidence, gathering and processing all data since Pix was launched in the 3Q20 and in our new top-down model for payment companies.
The first evidence we highlight is the transaction market share. By the 4Q21, Pix had gained an 8.9% market share. Also, it’s worth mentioning that credit cards gained market share during the period.
As the following illustration shows, bank slips, wire transfers, and withdrawals (cash) were the main losers.
Source: Giro Lino, BCB.
However, based on historical growth, we observed that Debit and Prepaid Card growth decelerated since Pix was launched, raising the question of whether Pix isn’t stealing the incremental volume directed to Debit.
If that is the case, and the argument sounds reasonable, Debit card penetration should slow in the following years.
On the other hand, we see evidence of accelerating credit card adoption since Pix was launched. After deep research, we concluded there is a different external factor for such acceleration.
New US-Listed Brazilian Fintech
Inter Platform #BIDI11 should join $NU, $MELI, $STNE, and $PAGS as another US-Listed Brazilian Fintech.
We're writing a quick "101" so investors get to know more about the company.
Yet, the company didn't confirm the US Listing. This is solely my opinion based on years following the industry.
Let me know if you have any topic we should include in the "101".
Upcoming Earnings Calendar! (March 14th - 18th)
Earnings season is slowing down, but there are still several very interesting companies reporting next week.
- $DLO - This company is really interesting. Growing quickly and profitably (28% net profit margin last quarter) while solving a real pain-point for companies.
- $GTLB - Don't know much about this company, but I've seen a lot of people commenting on it lately so I'll keep an eye out.
- $S - Extremely expensive cybersecurity stock.
- $FDX - Not interested in investing in the business, but very interested in their outlook for the supply chain and the impact of higher energy costs.
- $LEN - Homebuilder. Let's see what their comments are on the supply chain + demand for housing in the US.
What company are you interested in?
If you'd like an easier way to track earnings dates, you can automatically sync your portfolio's earning dates to your personal calendar with just a couple of clicks here.
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Food For Thought #4 [Free News]
### Long-Term vs. Short-Term
EM equities have outperformed the S&P 500 since January (~+10%) primarily because of ease in China policies. In addition, EM’s Central Banks have led the hiking cycle, and commodities prices are skyrocketing.
It’s no news that Emerging Markets ($EEM) have been underperforming the DM ($IDEV) markets since 2010, and, occasionally, there is the discussion whether the secular overperformance is doomed or not.
Source: BofA, Twitter.
Recently, the BofA released a report showing that Brazilian equities ($EWZ) outperform the market during the first year of a Fed Rate hike cycle since 1994, with equities rising 38.4% on average.
My pushback to the valuation argument on EM equities ($EEM) is that growth differentials have vanished over the years. The actual fundamentals don’t support that Emerging Markets close their discount to DM ($IDEV).
Unlike the early 2010s, when EM growth outpaced DM by ~5%, EM economies have grown roughly 2% above DM economies in recent years. In particular, Brazil has been lagging behind both EM and DM growth for almost a decade.
Nevertheless, the short-term performance of financial assets from emerging market countries has a higher correlation with commodities prices. Therefore, if commodity prices remain at a higher level for a more extended period, this will help EM countries to outperform DM.
The table above is a picture of what the discount should be today. Since it’s hard to estimate a proper cash flow for the next three to five years instead, I decided to estimate returns for the next twelve months.
In the short term, considering growth differential for the next twelve months sounds reasonable to EM equities to outperform DM.
Also, it’s important to highlight that a higher sustainable price for commodities would allow an even more significant outperformance. The big question mark I have is about the durability of growth differentials.
### Review Estimates
One exercise proven valuable across past years consists of reading sell-side estimates and creating reference points for that specific year.
That doesn’t mean foreseeing the future, but rather understanding what prices tell you. Indeed, estimating future cash flows is an arrogant exercise, but it helps you create your base rates on the market’s valuation.
For that, the S&P 500 ($SPY) is the mothership for all markets. On the table above, there is an estimate for the Index in 2022. What has caught my attention during my backtests is that the ERP and Risk-Free increased their importance as margin expansion lost its relevance.
That tells me that most upside risks are related to sales growth rather than margin expansion, and that cash flow duration has increased.
There is no recipe to follow if the market presents upside or downside risk to the model, but looking at the UST10 ($IEF) and growth rates over the years sounds like a plan.
### Stone ($STNE)
Every investor that pays attention to payment companies, or LatAm equities, has been wondering what will happen to Stone after the credit losses issue.
In this week's post, we reached out to this matter, specifically about raising funding costs, which will pressure STNE’s net income for the following years.
However, less volatility during rates cycles is more representative than the long-term rates. As discussed in a different edition (“Rates in Brazil and the $BRL”), the Brazilian CB has led the hawk cycle globally.
Also, an overshooting in rates would result in more volatility for $STNE’s quarterly earnings, limiting its re-rating capacity over the following years.
### Change in Regulation ($XP)
CVM (Brazilian SEC) studies a potential end of IFA (Independent Financial Adviser) exclusivity. Currently, the legislation allows IFAs to work with multiple distribution platforms but only one broker-dealer entity, obligating IFA clients to open accounts with the corresponding broker-dealers.
The new regulation would allow more flexibility for IFAs and increase competition for their partnership among broker-dealers. For years, $XP used the regulation and its bargain power over IFA to reach better financial agreements.
Over 90% of its IFAs are under an exclusivity agreement, meaning they cannot sell products to their clients out of a $XP environment. In my view, I don't know how meaningful the measure is since the new regulation still allows contractually paid exclusivity.
$XP has spent over R$3bn for agreements with IFA's offices and R$1bn acquiring minority stakes in those companies. Also, $XP allows the most relevant ones to turn into broker-dealers, mitigating the risk. So all in, I don't believe in any material change for the business.
I talked to a few advisers. Indeed, they were celebrating, but because they’ll have greater firepower negotiating exclusivity with XP, rather than the proposed changes will have a meaningful impact on investors’ life.
### The bumpy road ahead
In November of 2021, most economists expected two hikes over this year. After that, however, inflation presented itself as “less transitory” than expected, and now most banks are expecting seven hikes over 2022.
Also, on Friday, Russia’s concerns finally hit the markets after both the UK and the US suggested that Russia could soon invade Ukraine and advised their citizens to leave the country. By now, you probably notice that I don’t comment on politics, just on facts.
I think that foreseeing outcomes is an awful exercise when you can’t assess the results probabilistically. So instead, I’d improve and consistently apply my investment process, always looking to minimize losses.
Would you like to get access to my portfolio? Why don't you redeem your free trial coupon to my Substack?
Hi guys. Released my post on $STNE along the weekend.
All in, Stone will likely continue to face challenges in posting significant earnings expansion. First, the company suspended the origination in its credit business after issues with the receivables chambers, postponing monetization.
Second, Brazilian Central Bank has been increasing interest rates (+875bps in the cycle so far), pressuring Stone’s financial expenses and pass-through in prices.
Third, $STNE has been signalizing to the market higher selling expenses from now on. In my view, low-hanging fruits are over, so incremental merchants’ addition should come at higher costs.
Gathering the information provided by the large acquirer’s companies and the data provided by ABECS, the main highlights for 2021:
- New entrants are still gaining market share from incumbents (+200bps in the year). It’s interesting to notice, but Getnet lost market share throughout the year, even though the feedback I heard was that the company was going strongly in commercial propositions.
- $STNE and $PAGS were the main highlights. $STNE lost share in the first half of the year, but PAGS has shown significant share gain along the year.
- ABECS is pointing to a 30% growth in the industry TPV for 2021, versus the 24%expected by the beginning of the year. For 2022, ABECS expects another strong year, with a 24% growth (vs. 2021).
Keep in mind the Stone’s market share evolution over the past five years. I think the company will sustain the pace (+200bps) for the foreseeable future.
However, the company has been pointing out that the cost of acquiring customers has also been increasing.
Stone’s CAC (Customer Acquisition Cost) invests in hubs and POS hardware. Therefore, the increase, or decrease, in the D&A could foresee how aggressive the company is about future investments.
One might discuss that Stone is looking for a share greater than 200bps in 2022, and the actual CAC is the same, but I don’t see it this way. As we’ll discuss later on, Stone’s cash availability will be limiting its growth over the following years.
### Funding cost pressure
Unlike most companies, acquirers deploy massive capital into the pre-payment business. As a result, the reported balance sheet and the actual figures for cash and debt may diverge.
When an acquirer receives a demand to prepay money from merchants, it could use proprietary cash, issuing banks, or debt.
However, as the image above shows, the balance sheet doesn’t show the real impact when an acquiring company issues a bank for the pre-payment.
I don’t think that, formally, there is a name for this off-balance debt that is not in the Balance Sheet, so I named it Virtual Debt.
Channel Checks suggest that the tenor (length of time remaining before a financial contract expires) is between 50 and 65 days. So, considering that the period for a contract is 60 days, $STNE would have issued a ton of intra-quarter debt to fulfill its obligation to merchants.
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