VISA - Network Heaven

 VISA THESIS and FH24---TOP 10 Holding

Understandable business

Do you understand the positioning of the business versus its competitors, customers and suppliers? What are the critical products, services and relationships?

Is the size of the market(s) able to be estimated?

Are there existential risks to the business, structural decline, or obsolescence?

The V/MA duopoly is the historical result of the combination of banks (acquirer and issuer), retailers and customers, as well as the payment network (MA/V). the interactions of thousands of these participants make replicating this network very difficult. The network is very complex. The interactions are supported by the banks, the network operators, and the customers, with the retailers being the participants least happy with the system. The banks control the customers and cards that they can brand, the network operators get a small fee on increasing volumes with not much capex requirements, and customers get much of the extra costs reimbursed in reward programs on cards. The retailers pay 2-3% on sales to the various operators, mainly the issuing banks (1.6%), and V/Ma get about 15-20bp. The rest goes to merchant-acquiring banks and tech add-on firms (20bp).

The exact combination of fees varies greatly but usually, credit cards have higher fee than debit cards, international much higher than domestic (US), and small retailers have higher fees than large retailers.

V/MA have commenced introducing value-added services such as fraud detection and more secure systems that allow retailers even faster and no credit risk, across various payment types and geographies. Tokenisation the process where V uses a token instead of the card number, is made to reduce fraud, which it does, but it also embeds the users into the V network. Tokens have gained significant coverage. The VAS strategy has increased volumes, lock-ins and margins.

Competition exists in closed-loop systems that wear credit risk and are often run by one bank, or one retailer, Paypal has an existing payment system but is the same price as V/MA. A large possible risk is if there is a technological change that allows a new entrant to replicate the network but would need a system to bypass V/MA and connect to banks, consumers and retailers. Possibly an AAPL/Sq could be a combination, built around AAPl pay and POS units. AAPl charges another 15bp on top and uses V/MA at this stage.

Regulation is another issue and there is a history of litigation from DOJ etc. Reg II is designed to make choices available to a competitor one not being MA/V has been mooted. There are only really closed-loop networks outside of PYPL. AMEX and Discover are closed-loop competitors. An obvious competitor with a competitive advantage is not clear. Small retailers with low margins, and large numbers of transactions at low item value are vulnerable to higher interchange fees destroying profitability and therefore more likely to change providers if given the opportunity.

Note that international transactions are a large profit line. Networks that offer low/no fee currency transfers are a real threat if they eventuate.

MA/V is a mandated monopoly.

The rise of e-commerce has been a strong driver of growth for the network.

Total global payments ex china, $200T, cards are $20T. B2B $120T, B2C $30T -Visa Direct initiative. Over 50% of consumer payments to merchants now take place on cards so future growth will slow at some stage, as the market gets saturated, and points to V's efforts to enter other payment methods outside B2C.

Operating History

EPS growth, consistency/volatility is it forecastable?

ROE/GM stability and level. Ability to manage margins. Total asset growth can the business profitably deploy assets. What has the reinvestment rate been? NPM level and stability.

Does the business generate FCF, does CF reconcile to earnings?

Given the above has the company favourable LT prospects?

1.      Earnings have increased on a 5y roll over the last 5 years between 14-20%pa. over the last 13 years r2 earnings growth is 0.89 (high). Strong and consistent growth.

2.      GM has been (5yave) 97.1%, stdev 0.4%. -high and very stable.

3.      TA increased by a strong 11-16% (5yave) until the last three years when it declined to +5-6% pa. the numbers indicate a declining ability to invest due to the capital-light nature of the business, eps has not declined with this lower investment. The reinvestment rate is very low.

4.      NPAT margin (5yave) 51% with a range 48-53%. Extremely profitable.

5.      CFO exceeds NPAT and DA by 9% over 5 years, ie 1-2% pa.

6.      These are exceptional numbers.

Management

Conduct, stable, experience, and track record in deploying capital. Are the management forthright with info or do they blame outside influences, be overly promotional, highlight insignificant positives, not mention negatives?

Incentives are too easy? Too large? Not Aligned

1.      Management ownership is very low. 0.5%

2.      Management recognises that new products, new geographies and adding services are required to offset any fee declines.

Balance Sheet

Assess debt in absolute terms, relative to history, relative to similar companies.

Can use IC, FCC, ND/ebitda

The business is very free cash flow generative, debt has been low and capital requirements are quite low.

Other

Amortisation charges? SBC? Historical share dilution

What range has the company PE traded in over the LT?

Check y1 consensus estimates -are they sensible

What is the market obsessed about (good or bad)-2-3 main points

1.      Amortisation is close to zero.

2.      SBC has been growing, around 4% of NPAT in 2023

3.      PE range over (L5Y) 38X mean, 1stdev 43-33X, low 26X, high 52X. these are high numbers and reflect secure strong eps growth. The rating could be expected to be lower as the market saturates.

4.      The market is worried about regulatory changes, Reg II, interchange fee changes, potential new closed-loop systems, and the inability to grow new services or products. Note V /Ma have changed and locked in interchange fee reductions with mainly SME clients in the US for 5 years.

VALUATION

At $275 and assuming an exit 33X in 5 years with a 11% eps growth, gives a 13%pa. an exit PE of 25X gives a reasonable 7%pa. indicating strong buying around $245 which is 10%pa at 25X exit PE.

V will not make you rich but hopefully richer.

 

 Please note the disclaimer.