VISA-FY24 result--top 10 position--the Metronome

 VISA—Top 10 –position—FY24 result—the Metronome

Review of Result

Total transactions were 6% higher at $15.7T (yoy), with the US at 5% growth and APAC negative due to weak Chinese volumes. Visa revenues were 10% higher and NPAT 14% higher. Visa revenues as a % of total payments were steady at 22bp. NPAT margin was 55% up on last year's 52.9%. Guidance for FY25 was for growth to continue at the current rates, that is, revenue growth of around 10% and eps low double-digit 12-14%. Main risks were highlighted as macro shocks, ST/MT volatility impacting the revenues/payment ratio, incentive changes and X border variations. These are usual risks and can cause some variation in returns but are usually not large (of course depending on degree).

Reconciling NPAT to cash again showed high quality. 3Y and 5Y CFO was above NPAT + D&A  by 9% and 7% respectively. The Visa business model is not very capital-intensive. That is, growth continues without significant reinvestment. Over the last 10 years, 6% of CFO has been reinvested in capex and another 10% in acquisitions. Despite a total reinvestment rate of only 16% (capex and acq), Visa has compounded earnings at 16%, an extraordinary result. Visa has used the excess cash flow in share buybacks of $17B, $12B and 12B over the last 3 years reducing SOI by 3% on a 5Y roll. ND on EBITDA ended the year at 0.2X, which is very low.

As an investment, Visa is a high-quality, consistent compounder. Although the PE ratio is high, consistent earnings growth reduces it every year. The question is whether future returns are falling or becoming riskier. If that is the case much of the earnings growth will be offset by PE compression.

Competition and Regulatory Risk

Replicating the V/MA model is quite difficult but not impossible. Some retailers have attempted to move volumes outside the MA/V ecosystem by issuing cards and trying to get consumers to transfer funds directly from their bank account to the retailer's bank account. WMT is the largest and is making some progress. It does require some initiative on the part of the consumer to save what is, in reality, a small change for the consumer but a significant item for the retailer. Visa believes it can grow the business despite this headwind and that Visa adds value to its customers.

The DOJ has accused Visa of monopolising the debit market in the US. Visa holds a large and long-standing share of the market. Specifically, the DOJ holds that Visa has used its position to limit competition by 1. Entering exclusive arrangements, buying or partnering with potential competition, and 2. Enforcing onerous terms for entrants who wish to move volumes outside the Visa ecosystem. The DOJ points out that Visa’s position in debit is not replicated in credit or alternative payments. Visa intends to defend the allegations and states that the DOJ does not understand the payments ecosystem. There has, unsurprisingly, been a long history of conflict between the V/MA duopoly and regulators. The resolutions have to date not significantly impacted Visa’s growth and the progress of the case will have to be monitored. Owning a participant in an unregulated duopoly is an attractive scenario as long as the structure persists. Below is the US debit share of the market.

Risks to the long-term multiple

The large growth in payment volumes has been driven by the global cash-to-card digitalisation of the payment system. A big driver of this has been e-commerce gaining share over physical stores. These trends have some way to go but some slowing in penetration, especially in the well-developed markets such as the US and UK can be expected. There is still growth in traditional payments as even advanced countries such as Japan have a large cash usage and the less developed markets offer many years of growth. Visa has been active in attempting to drive growth and lock in volumes, introducing tokenisation (not using card numbers to reduce fraud which has the by-product of locking in customers) and tap to pay, tailoring solutions etc. That said the uncertainty increases as more growth is reliant on these other markets and the remaining cash transactions may prove more difficult to displace.

Visa is preparing for this by launching two growth strategies one called Value added services (VAS) and the other New Flows. VAS can be further broken down into five streams and can be described as ancillary services to the core. These include issuer services such as adding BNPL participants, managing card benefits, card and issuer processing, dispute resolution, cyber protection, fraud detection, using data analytics to advise and consult regarding marketing campaigns and finally open banking solutions. The growth has been around 20% and is currently about 10% of total revenues.  Therefore it is propelling growth and has the side benefit of assisting to tie customers into the ecosystem. However, it is relatively new and is not as certain as the traditional and well-proven growth strategies.

The other strategy is more nascent. New flows refer to all transactions outside of the traditional merchant-to-consumer transactions. These are big markets and are mainly in the commercial space. These include working capital payments, B2B, government-to-business, C2C and B2C. Verticals such as rent, utility payments and large purchases made outside the system are being targeted. The TAM for these transactions is many times larger than Visa’s traditional payments. Over time management expects these volumes to overtake the consumer volumes. Again the opportunity exists but execution is yet to be proven, although progress is being made. Visa Direct volumes were up 38%.

 

Valuation

The risk with Visa is that as we see earnings growth continue, as I expect it will, we see an ongoing PE derate as the uncertainties around the growth drivers change as well as the risk around any possible adverse  DOJ outcomes. At this stage, I see positive progress on the new business strategies but given the size of my position, I would like to add if the implied multiple assumes an ongoing de-rate but still offers a 10% TR.

The historical PE has averaged between 33-38X and the current PE is 30X (TTM). Assuming 12% eps growth for the next 5 years and requiring a 10% TR, ignoring dividends would give an entry price of $280 for an exit multiple of 26X, $250 for a 23X exit PE and $210 for a 20X exit multiple.

IMO strong value appears not too far below the current SP of $290.

EPS growth the metronome.

Appendix

Visa is the quality exposure given in the charts (below).

 

Please note disclosure