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Visa - mixed picture as coronavirus hits transactions

Nicholas Hyett, Equity Analyst | 1 May 2020 | A A A
Visa - mixed picture as coronavirus hits transactions

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Visa Inc USD0.0001 'A'

Sell: 194.33 | Buy: 194.37 | Change 1.44 (0.75%)
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Second quarter revenue rose 7% to $5.9bn, that's slower than last quarter but a little better than expected. Net income rose 6% to $3.1bn, while the ongoing share buyback programme supported a 9% increase in the earnings per share - which reached$1.38.

The group saw a significant decline in activity from March as the coronavirus outbreak impacted purchasing habits, most notably in cross-border volumes. Given the uncertainty created by the outbreak the group is not providing any guidance for the full year.

The group announced a quarterly dividend of $0.30 per share.

The shares were broadly flat in pre-market trading.

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Our view

The current crisis will likely change the world in many ways. One likely shift, in our view, is an acceleration of the shift to card payments from cash and cheque.

Not only has online shopping gained at the expense of traditional high street stores, but the increased infection risk associated with handling cash has spurred a shift towards card payment in those shops that do remain open.

As the world's largest payment processor, handling payments worth $8.8trn across 138.3bn transactions in 2019, that would be favourable for Visa. It helps that contactless payment is particular area of strength. Wider uptake would increase card use in small transactions, and with the contactless rollout in the US just getting started, there's still years of growth potential.

In the short term though we can expect some disruption and a decline in spending, and that will knock revenues. The almost complete collapse in international travel in particular has undermined lucrative cross border transactions. The good news is that, despite appearances, Visa isn't a 'credit card company'. It doesn't lend consumers money or run accounts, so it's not on the hook for the money if a customer defaults. Instead, Visa charges banks for transferring funds.

Service revenues are charged to card issuers, and are calculated based on the value of the transactions. Data processing revenues depend on the number of transactions that take place, and are charged to the bank of both the customer and the receiving business. Profitable cross border transactions come with additional fees and currency conversion revenues.

That's always been a very attractive business model. Additional transactions are virtually costless to Visa, so extra revenue turns straight into profit. Capital expenditure is limited, meaning profits convert well into cash. Of course the reverse is also true - so revenue will fall.

With net debt substantially less than one times last year's cash profits, that surplus cash can be returned to shareholders through a combination of dividends and share buybacks. The emphasis is on the latter, meaning the prospective yield is a modest 0.7%.

The payments industry is going through a lot of change at the moment, with competition from start-ups and more established rivals. Visa's been prepared to acquire newer rivals to grow its position in key markets - and is set to pay $5.3bn for fintech group Plaid. But the group sees organic opportunities too, and that's driving expansion into new payment technologies and geographies.

The shares are trading on 30.7 times expected earnings, a 36% premium to the longer-term average. That creates significant short term volatility risk if the stock were to de-rate, and means investors will need to be prepared to take a long term view.

Second Quarter Results

Revenue growth was driven by a 5% increase in payment volumes and 7% increase in processed transactions, with a headwind from a 2% fall in cross border volume.

Service revenues, which are based on payment volumes in the prior quarter, rose 9% to $2.6bn. Data processing revenues rose 11% to $2.7bn and international transaction revenues rose 2% to $1.8bn. Incentives paid to clients were worth $1.7 billion and represent 22.6% of gross revenues.

Operating expenses rose 4% year-on-year to $1.9bn, or 3% if you exclude one-off expenses.

Visa generated free cash flow of $3.7bn during the quarter. Share buybacks and dividends totalled $3.9bn during the quarter. Net debt reached $5.7bn, although the pending acquisition of fintech group Plaid will see it rise in the future.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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