Will Latitude's Float Match Afterpay’s Stellar Growth?
By Dale Gillham | Published 11 October 2019
With the success of Afterpay and Zip, we have seen an increasing number of companies enter the buy-now-pay-later space in order to capture the increasing demand for these payment services.
With Afterpay rising over 200 per cent and Zip rising over 800 per cent in the past two years, investors have scrambled to gain a slice of the action. Given this, it’s not surprising that Latitude Financial is launching an initial public offering (IPO) this month. But will Latitudes float match Afterpay’s stellar growth?
Buy now pay later (BNPL) landscape
The traditional financing market is feeling the impact from the growth of BNPL companies, as it is overtaking credit cards as the preferred method of payment by younger shoppers. Millennials are the leading users of these short-term loans, with almost half having already used a BNPL service, while almost 90 per cent are aware of BNPL.
This disruption to traditional financing is changing the way consumers approach credit and in my opinion this area will continue to grow, as it just makes sense. They can be cheaper than credit cards and can relieve the hassle of being caught short when you need something before payday. There is no question that this $903 million industry is on the rise, with an increasing number of competitors entering the space.
Can Latitude match Afterpay’s growth?
In my view, Latitude Financial is well positioned for growth and has a long history of building a successful payments, instalments and lending business. Latitude is backed by Värde Partners, KKR and Deutsche Bank, and have transitioned from GE into what they are today.
Currently Latitude have 2.6 million customers and support more than 1,900 merchant partners across Australia and New Zealand, with the merchant base quite powerful given that it can deliver a strong acquisition channel.
So is the IPO attractive? Latitude is issuing shares to the value 35 per cent of the company at a price of between $2 to $2.25 a share (Note: Latitude announced yesterday that it had dropped the asking price to $1.78). On a market captialisation basis, this will value the company at between $3.5 and $4 billion (which is now reduced to $3.2 billion with the lower asking price).
The initial price represented a price earnings ratio of between 12 and 14 times, which in my opinion, makes the asking price a little high, as I said last week. This may explain why they have decided to reduce the asking price. That aside, the business model of Latitude Financial is promising and the growth profile in the BNPL area is attractive, all of which are positive signs.
Top and bottom performing sectors and stocks
Looking at the sectors on the Australian market, most have been relatively flat, although the Industrials and Healthcare sector have been standouts rising around 2 per cent last week with Communication Services not far behind. Materials, Energy and Consumer Discretionary, on the other hand, fell into the red.
Looking at the stocks in the ASX top 100, Orora was up over 11 per cent after announcing a deal to sell its Australasian Fibre business to Nipon paper on Thursday. Surprisingly, Cleanaway was up around 8 per cent after agreeing to buy failed recycler SKM. Brambles and REA were also strong performers both up over 4 per cent.
The worst performers include Flight Centre, which took a dive trading down over 10 per cent on fears of profit downgrades due to global unrest. Financial stocks Magellan Financial and AMP also fell over 6 per cent.
So what’s next for the Australian stock market?
After a strong start last week, volatility returned as expected to drive the market back down to near where it started for the week. Despite all of the noise around global uncertainty, the way our market unfolded last week is a good sign that while it is bearish, it is not overly so.
I still expect further falls this month, and with the US moving into another quarterly earnings reporting season, this may just be the catalyst for the move down into the low I am expecting.
In times like we are seeing right now, uneducated investors are falling prey to market myths and false ideas given that many believe the market will crash soon. However, it’s important to understand that since 1875 the Australian stock market has never experienced another major market crash approximately 10 years after the previous crash.
Typically, major market crashes occur at least 20 years apart. Given that the last major crash on the Australian market occurred in 2008, we can anticipate that the next major crash will occur sometime in the second half of the next decade.
So in the short term, our market will fall to between 6,400 and 6,200 points into the yearly low I have been expecting before the end of October. Following this, the market will rise into Christmas and the bull run over the past few years will continue.
Let’s get into this week’s stocks of interest. Watch the video to find out more.
Good luck and good trading!
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.