Stone has a loss of R$150m with adjustment for credits receivable; analysts see negative data, but Credit points to priced action

SAO PAULO – Payments company StoneCo (STNE) lost in the second quarter, with an extra provision, after admitting that it was surprised by failures in its credit business. After the result, worse than expected by analysts, assets had a drop of 6.06% in the Nasdaq pre-market around 9:30 am (Eastern time), to US$ 46.50.

The company announced on Monday that it had an adjusted loss of R$ 150.5 million in the period, compared to a profit of 150.3 million a year earlier. In net terms, the company had a profit of R$ 526 million, but due to an accounting gain of 715 million with the mark-to-market of some investments.

Although it saw its total payment volume add up to BRL 60.4 billion, up 58.6% in one year, StoneCo saw a deterioration in several of its metrics, due to a decrease of BRL 397.2 million linked to adjustments in the estimated amount of credit receivable and, consequently, lower loans.

The company’s total revenue, which in July concluded the acquisition of the retail software company Linx, was R$ 613.4 million, 8.1% lower year-on-year.

“Despite the strong evolution in our core SMB (small business) business, we currently face challenges in our credit operation, mainly as a result of higher levels of defaults and lower expectations of recovery from delinquent customers,” said StoneCo in the report on the swing.

“While we recognize that our underwriting and collections process capabilities still need to evolve due to the early stage of our credit solution, we believe that the malfunctioning of accounts receivable service providers played a major role in the sub-par results, as it allowed merchants to transfer transactions to other procurement services that, in practice, circumvented the collateral they gave us,” he added.

Credit Suisse highlighted that Stone reported weak results, with additional provisions (PDD) leading to a negative impact of BRL 397 million from the credit product on the company’s total revenue. Provisions also led the company to report a negative adjusted net income of R$150 million, versus an expected positive figure of R$300 million.

Even excluding the negative impact of the credit product, the numbers would still come with a disappointment compared to consensus expectations on net income and net income, analysts point out, mainly due to a slightly weaker take rate – fee charged for each transaction – and growth capital and financial expenditures higher than expected.

Credit analysts believe that second-half results should remain limited by little or no credit origination and intense competition in the SMB, but point out that this more negative scenario appears to be already priced after the share fell 40% year-to-date.

“Despite the short-term challenges, we continue to see credit as an opportunity that should contribute to the expansion of the take rate in the future. In addition, Stone reaffirmed its guidance [projeção] of 950,000 customers per year, which implies strong net adds of around 90,000 per quarter in the second half”, assess, which analysts believe will be a little challenging. Finally, TON, from Stone’s means of payments division, is growing rapidly and could surprise, they say. Analysts have an outperform recommendation (performance above the market average) for the paper, with a target price of US$ 100, a potential increase of 102% compared to the previous day’s closing.

Itaú BBA analysts also point to Stone’s results as much worse than expected by them, also highlighting the impact of the adjustments in the credit product.

“Although management has recently signaled issues related to the registration of accounts receivable – leading to additional provisions and lower loan disbursements – we believe that the challenges currently facing the company may raise questions about the potential and pace of growth of the credit solution , a product that we consider key to the company’s thesis and to the fair value of the share”, they assess.

They reinforce that the 2021 guidance (provided in the first quarter) for take-rate and adjusted net income was suspended, but the guidance for net additions was maintained.

“Despite the company’s efforts to clarify and anticipate issues related to the recording of receivables that hampered credit provisions and disbursement during the quarter, we believe the current challenges had a greater impact than expected in the second quarter. They are also likely to press the next quarterly results because it will take some time for Stone to resume credit disbursement. That said, while we recognize that quarterly results place significant negative pressure on our estimates, we have chosen to maintain our projections for the company for the time being, as we seek to understand: i) the loan portfolio’s growth prospects and potential for profitability in the current challenging scenario; and ii) the short-term effects of the change in the product accounting methodology”, point out BBA analysts.

The bank’s recommendation, at the moment, is outperform, with a target price of US$ 95, or a potential increase of 92% compared to the previous day’s closing.

(with Reuters)

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