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Visa - less transactions and less travel weighs on results

Nicholas Hyett, Equity Analyst | 29 October 2020 | A A A
Visa - less transactions and less travel weighs on results

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Visa Inc USD0.0001 'A'

Sell: 196.21 | Buy: 196.22 | Change -1.97 (-0.99%)
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VISA reported full year revenues of $21.8bn, down 5% year-on-year, as the coronavirus pandemic negatively impacted the number of overall transactions and number of cross border transactions in the latter part of the year. Full year earnings per share fell 8%, or 7% excluding the effect of changes in the value of certain tax assets.

The group returned $10.8bn to shareholders during the year through a combination share buybacks and dividends.

Visa shares were broadly flat in pre-market trading.

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Our view

The current crisis will 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 $11.3trn across 140.8bn 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.

However, the group hasn't escaped the coronavirus unscathed. Far from it.

Continued disruption and a decline in spending has knocked revenues this year. The almost complete collapse in international travel in particular has undermined lucrative cross border transactions and that looks set to continue for some time. 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 0.7%.

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 - 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 particular as an attractive business. However, at 30.8 times expected earnings, the shares trade at a 30% premium to the longer-term average. That creates significant short-term 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: 30.8
  • 10 year average Price/Earnings ratio: 23.5
  • Prospective yield: 0.7%

All ratios are sourced from Refinitiv. 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.

Fourth Quarter Results

Visa's fourth quarter revenues fell 17% year-on-year to $5.1bn, while earnings per share fell 28% (or 23% on an underlying basis). The revenue fall reflects the decline in cross-border transactions which were down 29% year-on-year, or 41% excluding those within Europe.

Visa cards were used in $3.0trn worth of transactions in the three months to the end of September in line with the same period last year. Transaction numbers hit 49.6bn, up from 47.8bn over the same period last year.

Service revenues, which are based on payment volumes in the prior quarter, were down 13% year-on-year at $2.2bn. Data processing revenues rose 4% to $2.9bn and international transaction revenues fell 38% to $1.3bn. Incentives paid to clients were worth $1.7 billion and represent 25% of gross revenues.

Quarterly operating expenses fell 4% year-on-year to $2.0bn. That reflects a 31% decline in professional fees, with General & Administrative expenses down 25%. Network & Processing and Marketing expenses also decreased. However, Personnel and Depreciation & Amortisation expenses rose 6% and 10% respectively.

Visa generated free cash flow for the year of $9.7bn, down from $12.0bn a year ago. The group reported net debt of $4.0bn, compared to net debt of $4.7bn a year ago.

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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 Refinitiv. 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.