Investment Overview
Global shift from cash to digital payments a key long-term driver, boosted by growth of cross border payments. Growth drivers of Mastercard include the (i) global migration from cash to electronic payments that is boosted by increasing e-commerce penetration, (ii) rising consumer spending, and (iii) growth of cross border payments on the back of travel and e-commerce. Consensus estimates point to a 17% and 15% increase in cross border volume fees in FY24F/FY25F, which will likely drive growth as global travel demand continues to show sustained recovery. Notably, Mastercard has higher exposure to international payment volume contributing c.68% of its FY23 gross dollar volume (GDV) compared to Visa’s 55%. We are of the view that the growth opportunity for Mastercard is larger given the higher cash and check penetration rates in regions outside of North America ranging from 28% in Europe, 19% in APAC, 41% in CEMEA, and 38% in Latin America compared to 11% in North America.
High net margins above 50% owning to strong competitive moat. Mastercard operates in a lucrative oligopoly, and it reaps powerful network effects owning to the vast number of merchants and cardholders that it serves. Mastercard now serves more than 110 million merchants which grew at a CAGR of 17% across the last 2 years. In its two-sided platform business model, every cardholder or merchant that comes onboard with Mastercard creates incremental value for the other party, which in turn deters incumbents by creating high barriers to entry. Consequently, Mastercard enjoys high net margins in excess of 50% which are significantly higher than the vast majority of businesses.
Lift TP to US$540, maintain BUY. Rolling over to FY24/25F EPS, we lift our target price to US$540, based on 36x PER (previously 33x PER), which is 0.5 S.D. below its last 5-years average and implies an EV/EBITDA of 26x. Mastercard has a valuation premium compared to Visa given its higher earnings growth potential. According to consensus estimates, Mastercard has the highest EPS CAGR of 19% between FY23-25F compared to Visa’s 16%. Long term secular trends such as the shift from cash to electronic payments will be a key driver for Mastercard, reinforcing our BUY recommendation.
Risks
Severe and prolonged recession. If consumer spending habits are significantly altered due to a downturn or market expectations of a downturn, the core business may be hampered by lower volume fees.
Buy Now Pay Later (BNPL) displacing credit. The growth in BNPL penetration rates could pose a risk to credit as consumers substitute credit card transactions with BNPL. A McKinsey consumer study shows that 39% of survey participants would have used a credit card for their purchases if BNPL did not exist. Nonetheless, Mastercard has developed its own BNPL product as a hedge.
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