WU/MGI:2Q Preview~Expect No Major Surprises;US Outbound Remains Strong,Int’l Mixed

We expect mixed 2Q results for money transfer firms, with solid US outboundtransfers, but potential deterioration in international trends (specifically in the MiddleEast) limiting upside. Beyond the quarter, we expect overall healthy growth butconcerns over increasing regulations/Brexit/US election might limit stock upside in2H. We also don’t expect margin surprises in 2Q as industry-wide pricing remainedessentially steady in the quarter. As such, we expect both WU and MGI to maintaintheir respective FY guidance ranges, and see more upside potential in WU stock thanin MGI on 2Q results (WU up 13% and MGI is up 18% over the last month vs. S&P500 up 8%). Longer term, we remain cautious on the sector as MGI still has the WMToverhang and WU needs to invest in Digital to drive sustainable upside.

    2Q expectations. We expect continued weakness in WU’s Middle East business,slight improvement in Russia revenue trends (vs. 1Q), and continued strong USoutbound to arrive at essentially unchanged revenue growth in CC. Our FY estimatecontinues to point to 2.7% growth in CC, inline with the company’s guidance. ForMGI, we expect overall strong growth in the US outbound and non-US internationalbusinesses. EEFT reported continued solid money transfer trends in 2Q, whichcould weigh on MGI’s US-to-US business. We slightly tweak down our const. FXestimate at MGI, but remain within the guided range for FY16.

    Intra-quarter corridor data suggests continuation of 1Q trends. Intra-quarterdata suggests incremental deterioration in Apr-May’16 remittances from the MiddleEast, compared to 1Q trends, despite significant improvement in Oil prices in thequarter. We expect potentially better trends in the month of June and rest of the year,assuming Oil prices remain firm. By comparison, Russia likely improved on asequential basis (partially due to easier comps). US outbound data remained strong,with continued double digit growth in transactions to Mexico (in Apri-May vs. 9%in 1Q). Western European transfers were likely down in sequential trends, based onanecdotal data.

    Near term themes to consider for beyond 2Q – Regulations, Brexit, US elections.

    We believe the recent increase in terrorist attacks in Europe could lead regulators tofurther tighten anti-money laundering and terrorist financing requirements, whichcould potentially hurt money transfer volume. Separately, we expect Brexit could beneutral to mild positive over the near term as it could spur increase in migrations aheadof potential rule changes over the next few years (if that happens at all). We alsoexpect increased FX volatility post-Brexit could drive higher near term volume forWU Business solutions (B2B business). Finally, outcome of the US elections is goingto be a key theme for the money transfer stocks, which should not impact 2Q trends bymuch, but could impact trends/sentiments in 2H.