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Visa - travel bans weigh on cross border revenues

Nicholas Hyett, Equity Analyst | 29 July 2020 | A A A
Visa - travel bans weigh on cross border revenues

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Visa Inc USD0.0001 'A'

Sell: 221.61 | Buy: 221.64 | Change -2.58 (-1.15%)
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Underlying net revenues fell 17% in the third quarter to $4.8bn driven by fewer cross-border transactions. Net income fell 24% to $2.3bn, despite a reduction in operating costs. Earnings per share fell 23% to $1.06, benefiting from substantial share buybacks completed during the last 12 months.

The board approved a $0.30 per share dividend on 20 July, with total payments to shareholders through share buybacks and dividends of $1.6bn in the quarter.

The shares fell 1.4% in pre-market trading following the announcement.

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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 away from cash and cheque towards card payments.

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 as shops reopen.

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 continued 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. 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 short term revenue falls will be painful.

With net debt substantially less than last year's cash profits, 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 0.6%.

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 - forking out $5.3bn for fintech group Plaid. But the group sees organic opportunities too, and that's driving expansion into new payment technologies and geographies.

We continue to see payments in general, and Visa in particaulr as an attractive business. However, at 34.4 times expected earnings, the shares trade at a nearly 50% premium to the longer-term average. That creates significant short term volatility risk if the stock were to de-rate, and means investors need to be prepared to take a long term view.

Visa key facts

  • Price/Earnings ratio: 34.4
  • 10 year average Price/Earnings ratio: 23.0
  • Prospective yield: 0.6%

We've introduced this section in response to recent survey feedback.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third quarter results

The decline in revenue reflects declines in the volume and value of payments in the quarter, and also a significant decline in the number of cross-border transactions.

Visa cards were used in $2.5trn worth of transactions in the three months to the end of June compared to $2.8trn in the three months to the end of March. Transaction numbers fell to 40.7bn from 45.7bn over the same periods. Cross-border transaction values fell 37% year-on-year.

Service revenues, which are based on payment volumes in the prior quarter, were flat year-on-year at $2.4bn. Data processing revenues fell 5% to $2.5bn and international transaction revenues fell 44% to $1.1bn. Incentives paid to clients were worth $1.5 billion and represent 23.8% of gross revenues.

Operating expenses fell 5% year-on-year to $1.8bn. That reflects a 38% decline in marketing expenses, with further declines in Network & Processing, Professional fees and General & Administrative costs. Personnel costs rose 8%.

Visa generated free cash flow of $7.8bn during first 9 months of the year, down from $8.2bn a year ago. Net debt came in at $4.2bn, down from $4.7bn this time last year.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.