Updates on PAGS, YI, SBSAA

Closing GTXAP and MVC

A list of my current active ideas are at the bottom of this write-up.

I thought I would do a follow up on my Pagseguro (PAGS) article last month, as the write-up was a bit too brief. It was mentioned in the comment section that PIX is the reason the stock is cheap and that it will take market share from Credit Cards in Brazil. PIX is Brazil’s recently introduced central bank payment system. Making it easy to cheaply make online payments. The only drawbacks are no chargebacks and supposedly there have been some security breaches. 

So far it does not seem to have caused a decline in credit card transaction volume though:

Source

And in the conference calls management does not really see it as a threat, and it actually helps their Pagbank segment which processes 10% of Brazil’s PIX transactions. 

From the Q4 call:

“Regarding to PIX and debit, we know that PIX is similar to a debit card transaction because it goes straight to your balance. We don't see that cannibalizing the clients that we have, maybe is cannibalizing part of the debit card transactions. But in Q4, for instance, we didn't see this kind of movement because debit card transactions increased in our base. So people keep using debit cards. The usage is easy. It's safe. People know how to use it. They know if they have our problem, they have chargebacks and so on. So we don't see that as a big transformational movement, although people are using PIX to replace wire transfers, replace cash and replace bank slips, boletos in the e-commerce. Those are the main features that people are using for PIX.”

I also want to elaborate a bit more on interest rates and a risk I did not mention in my write-up. PAGS basically generates interest from credit card receivables they buy from merchants. Cash is settled in Brazil in 30 days as opposed to 2-3 days in most markets. 

This VIC write-up thinks it would have a 25-40% impact on net income if this would be changed (although revenue has almost doubled now since and scale matters). But it seems unlikely regulators would do this as it would hurt the smaller players and help the larger players and likely hurts consumers as well. But if inflation stays low, and the smaller competitors also become large, this will become a bigger risk. The VIC article goes into more detail if you care to know. 

Juxtaposed against this is the strong possibility of lower interest rates and rapid growth of Pagsbank. Bank deposits have a lower cost of capital vs central bank loans. And PAGS deposit base is growing very rapidly.

The Brazil March inflation print came in at 4.65%. So it seems likely their cost of capital will be drastically lower a year or two from now while revenue will be barely affected as this doesn’t seem to swing as much with interest rates. From the Q4 conference call:

"If the rates -- interest rates goes down, our financial expenses will go down. And we do not expect to decrease prices automatically. The dynamics or the moving parts here will be the following. In long tail, we had the same rates since 2016. I mean the past years is exactly the same rates, the prepayment, MDR and so on. So if the rates -- the interest rate goes down, we're going to recover margins in long tail in the next business day."

I have no idea why rates are still so high. I expect a major catalyst to be an announcement of lower interest rates somewhere in the next 6-12 months. I generally don’t like to predict macro events, but a nearly 10% real interest rate? Come on! 

Add in some growth and this stock could be a home run.

My largest position, 111 inc

Ever have the problem you buy a stock and it bothers you that you don’t own more of it? 111, inc (YI) is such a stock for me. It grew to a 9% position now. Even if the merger doesn’t go through it seems really cheap. Some reasons why I really like this stock:

• Revenue will go over $3 billion soon now that the Covid headwind is gone. If they just generate 2% margins on that, that would mean a PE ratio of <4x. They became profitable last December. This means a strong incentive to get a deal done soon.

• Management is above average coming from large Western companies, not your typical shady Chinese ADR management (if you don’t count the lowball buyout).

• They got rid of the VIE structure in 2022.

• Management invested $3.5 million of their own money at almost 6x the current valuation in 2020.

A lot of my stocks are probably not going to be 10 baggers, at least not in the near term. But with this stock could still be a big winner, even if the buyout somehow does not materialize.

Speaking of the buyout, from their Q4 call:

“Yes. On the privatization, we understand that the process of the privatization is still ongoing. And the independent committee is working with the Buyer Group on the privatization proposal. The company should make all necessary public announcement according to SEC rules. So I would suggest that you stay tuned on the announcement if there's any to be made by the company. Thank you.“

Spanish Broadcasting

The bonds have slowly traded down again into the mid 60’s, and so has the stock. They still have not reported Q4, which I expect to be good. And again they sunk $7.5 million into a new radio station in Houston. They are really going allin on growth. I had sold down most of my shares, but bought some back at just above $1. This either gets sold for more than $300 million or they actually manage to delever at some point. 

The bonds at least seem like a no-brainer here, if you can get them in the low 60’s. They are pretty illiquid. Assuming $30m of proceeds is used to pay down debt, bond market values the company at about $170m here with some pretty hard catalysts and a 15% yield. 

Carisma therapeutics/Sesen Bio

This trade was disappointing as Carisma shares immediately plummeted after the merger. But recently they ticked up to almost $5 and I sold all my shares. I don’t really like these pre revenue biotechs, I have no idea how to value them. I think I got my money back now and the CVR is a free roll. I will probably stay away now from these busted pharma companies. They are a bit of a headache for the small amount of upside you get.

I wasn’t quick enough writing this, so sadly they are now back to just below $4. I think if you sell here you get about $0.55 per SESN share. Plus the possible $0.14 for the CVR.

Garrett Motion Preferred

Did some more thinking on this and I don’t think it is that cheap. They will do a conversion of the prefs in a few months time. Pref shareholders will get about $1 in dividends. So the market cap would effectively be $2.5 billion after dividends a few months from now, assuming 310 million shares. Net debt will be about $1.1 billion after paying the dividends. EBITDA is expected to come in at around $585 million, D&A of $80 million, interest of $100 million? Which then comes down to $300 million of normalised earnings. So stock is basically trading at over 8x earnings. Or 12x EV/earnings. 

Which I don’t think is that cheap. Since this will go into terminal decline, and it will be hard to say when. Maybe 2 years from now? Maybe 5? Probably less than 10 though. So upside is pretty capped here, and I am finding a lot of new ideas now. So far it has returned a nice 18% including dividends in the past 6 months. 

So I am taking this stock off the list. 

Metrovacesa

Similarly this one has run up a bit and paid a fat 1.05 euro dividend recently. They are a slow liquidating Spanish real estate developer. I will keep it on my watch list now, but after returning 25% in the past 8 months it is time to move on. I think further upside is another 50-60%, which doesn’t seem as cheap anymore, since it will take some time to realise that. A buyout has not materialised and there is cheaper stuff out there. 

So I am taking this off the list of active ideas as well. 

FYI, these are my current active ideas from my main write-ups (click to enlarge):

And from quick mentions/brief write-ups (click to enlarge):

Performance of closed ideas mentioned on this blog:

A pretty decent result, but I want to be a bit more focussed from now on and hold stocks for longer. I think I also have to group ideas into high conviction and regular conviction (and obviously dump low conviction ideas) and see if my higher conviction actually get higher returns over time.

My system makes it hard to hold stocks for longer though. I usually estimate a plausible normalized PE multiple range for a stock. So for example for Greif B shares that was 7-11x based on where it traded historically. I want both my min and max upside to be positive, or at least max upside to be close to 100%. So when it traded at over 8x earnings, I moved on. I am more of a multiple arbitrage and special situation investor, not really a compounder bro.

British American Tobacco (BATS) for example has min upside now of 14% and max of 91%. So I quite like it combined with the 8%+ dividend that is growing. But if the stock were to move up another 15-20% I’d probably sell it, since I have other stocks that have min upside of 20-30% now (but lower dividends yields). And max upside of more than 100%. Doesn’t mean that I think BATS is expensive if I sell it, just that the easy gains would have been made.

It is actually quite rare for ideas to go over 50% min upside or over 200% max upside with this system. Halyk bank and First Pacific are one of the few ideas with a min and max upside of more than 50% and 200% respectively right now.

That will be all for today, as usual, do your own due diligence and I may buy more or sell any of these stocks at any time.