Company Overview

The Western Union Company (NYSE: WU) is a global leader in payment services, offering individuals and businesses globally via efficient methods to transfer money and make payments. The company services are available around more than 200 countries and also through money transfer transactions conducted and funded through websites and mobile applications marketed under the Company’s brands. WU earnings are primarily obtained from the fees that consumers pay to transfer money.

WU Details

Key Takeaways from Q2FY21 (ended June 30, 2021)

• Growth in Revenues: The company's revenue in Q2FY21 amounted to USD 1.29 billion, a 15.70% rise year on year from USD 1.11 billion, mainly due to increase in transaction volumes.
• Progress in Operating Income: The Company’s operating income for Q2FY21 was USD 254.9 million, up 14.92% from USD 221.8 million in Q2FY20.
• Significant Improvement in Net Income: Net income was USD 222.5 million in Q2FY21, compared to USD 161.9 million in Q2FY20.

Revenues & Gross Profit Key Highlights;  Analysis by Kalkine Group

Recent Developments

• On October 13, 2021, Western Union International Bank (WUIB), a subsidiary of WU, became a Direct Participant in the Single Euro Payments Area Instant Credit Transfer system (SCT Inst), boosting the company's real-time payment capabilities throughout Europe.
• On October 12, 2021, WU stated that it had finalised the purchase of a minority stake in stc Bank, a prominent digital wallet service provider in Saudi Arabia. WU has purchased a 15% stake in stc Bank for USD 200 million.
• On September 15, 2021, WU and Suhyup Bank, one of South Korea's major banks, announced a partnership to provide international money transfer services, connecting clients in South Korea to overseas.
• On September 05, 2021, WU and Cebuana Lhuillier, the Philippines' largest micro-financial services provider, announced the launch of digital money transfers, allowing customers to receive and send money transfers via the Cebuana Lhuillier Mobile App - eCebuana (or eCeb).
• On August 4, 2021, WU announced its agreement to sell its business solution to Goldfinch Partners, LLC (Goldfinch) and The Baupost Group, LLC (Baupost) in an all-cash transaction for approximately USD 910 million.

Other Key Findings in Q2FY21 (ended June 30, 2021)

• Transaction in Consumer-to-Consumer Segment: WU reported a C2C transaction of 78 million in Q2FY21 compared to 68 million in Q2FY20.
• Principal per Transaction: In Q2FY21, WU recorded a transaction worth 27.9 billion principal, representing a Principal per Transaction of 11%, compared to an entire principal of 21.9 billion, showing a Principal per Transaction of 7% in Q2FY20.

Steady Dividends

On July 22, 2021, WU announced a quarterly cash dividend of USD 0.235 per share, which was paid on September 30, 2021, to shareholders of record on September 16, 2021. Over the last five years, the company has regularly paid dividends, as also reflected in the chart below (every D represents a dividend payment):

Consistent Dividends (Data Source:  REFINITIV)

Balance Sheet & Liquidity Position

• Decline in Cash Balance: The company exited Q2FY21 with a cash balance of USD 1.06 billion, down 25.68% from USD 1.43 billion at the end of FY20.
• Improvement in Cashflow from Operations: Net operating cash inflow during H1FY21 was USD 349.5 million vs. USD 347.8 million during H1FY20.
• Improvement in Debt Profile: WU's total outstanding debt was USD 3.00 billion as of Q2FY21, 2.30% less than the USD 3.07 billion stated total debt as of December 31, 2020.

Key Metrics

In Q2FY21, WU's operating and net margins were 19.8% and 17.3%, higher than the industry median of 13.6% and 7.3%, respectively. EBITDA margin stood at 24.5% in Q2FY21 vs. the industry median of 18.0%.

Profitability Profile; Analysis by Kalkine Group  

Top 10 Shareholders

The top 10 shareholders together form around 50.57% of the total shareholding, while the top 4 constitute the maximum holding. The Vanguard Group, Inc. and BlackRock Institutional Trust Co., NA hold the maximum stake in the company at 11.81% and 9.79%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group

Risk Analysis

• Dependence on Agent Network: Most of the company's consumer-to-consumer income is generated via its agent network. As a result, any change in relationship or attrition of agents and subagents may harm the company's financial situation.
• Competition Risk: Money transfer and business payments are highly competitive businesses with service providers from various financial and non-financial business sectors. As a result, WU's distribution network and channel options have been and may continue to be impacted by increased competition from new competitors and consolidation and expansion of competitors' services, which could harm the company's financial condition.
• Global Trade Risk: A decline in international trade, including increasing tensions between countries, or the inability of long-term import growth rates to recover to historic levels, could harm the company's financial condition and cash flows.

FY21 Outlook

• Looking ahead, WU anticipates its FY21 GAAP revenue to increase by the mid-to-high single digits, with a GAAP operating margin of about 21%, reflecting further projected acquisition and divestment expenses.
• It expects its effective tax rate (both GAAP and adjusted) to be in the mid-teens.
• Its adjusted GAAP EPS is expected to range between USD 1.82-1.92, considering pension plan non-cash termination charges as well as acquisition and divestment costs.

Valuation Methodology

Price/Earnings Per Share Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation

Over the last six months, WU corrected ~18.55%. The stock is currently leaning towards the lower band of its 52-week range of USD 19.07 to USD 26.61. We have valued the stock using the Price/Earnings multiple-based illustrative relative valuation method and arrived at a target price with an upside of low twenties (in percentage terms). We believe that the company can trade at a discount compared to its peer's average, considering its significant leverage profile, business divestiture, dependence on agent network and increasing competition in the payment space. We have taken peers like MoneyGram International, Inc. (NASDAQ: MGI), Mastercard Inc. (NYSE: MA), Visa Inc. (NYSE V), among others.

Considering the robust top and bottom-line performance, strategic growth initiatives, strong profitability margins, associated risks, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 21.29, up ~0.14% as of October 18, 2021.

WU Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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