Company Overview: Laybuy Group Holdings Limited (ASX: LBY) is a buy-now-pay-later (BNPL) player that provides a payment platform to its customers. Commenced in the year 2017, the company has established itself as a leading BNPL provider in New Zealand, with a growing presence in Australia and UK market. As at 30 September 2020, the company had more than 6,000 Active Merchants and over 550,000 Active Customers on its platform. In the New Zealand market, the company’s competitors include famous names like Afterpay Limited (ASX: APT) and Zip Co Limited (ASX: Z1P).

LBY Details

Growth in Active Customers and Merchants Across All Regions Aids LBY: Laybuy Group Holdings Limited (ASX: LBY) is a fintech company that offers buy now pay later services. As on 15 January 2021, the market capitalisation of the company stood at ~$252.97 million. Recently, the company provided a trading update for 3QFY21 for the period ending 31 December 2020. In 3QFY21, LBY’s Gross Merchandise Value (GMV) came in at NZ$182 million, which skyrocketed 184% from the prior corresponding period. The company had witnessed robust growth in November 2020, owing to the numbers of consumers, who are making use of the company’s innovative payment platform. GMV increased a whopping 220% year-on-year to 30 November 2020 and came in at NZ$71 million. Further, the onset of Black Friday and Cyber Monday in the month of November combined with the start of the Christmas shopping aided the growth. The momentum continued in the month of December 2020, with GMV skyrocketing 168% on pcp. This depicted the second highest trading month across all geographic regions.

COVID-19 led ‘Stay at Home’ orders in the United Kingdom assisted to drive an online retail revolution, with rising numbers of users making purchases online as retail stores are kept closed. Australia and New Zealand (ANZ) region saw an increase in the in-store contributions, aided by the launch of “Tap to Pay” instore solutions. Annualised GMV, Active customers and Active merchants grew 184%, 117% and 64%, respectively, year over year in 3QFY21, depicting a continuous upward movement.

Further, the company has also witnessed a rise of 439% in UK active customers and a 427% increase in UK active merchants, during the period.  We believe that the company remains on track to achieve its long-term goal of creating a global brand and strengthening its positioning as a leading Buy Now, Pay Later provider in the market.

3QFY21 Trading Update (Source: Company Reports)

The business continues to perform strongly with the addition of over 60,000 active customers and 1,000 active merchants since 30 September 2020. Due to the increasing consumer demand for credit alternatives, the outlook for the BNPL industry remains positive. The company is currently focused on growing its presence in the United Kingdom and Australia while solidifying its position as a leading BNPL provider in New Zealand. Under its partnership with Mastercard, the company expects to increase its customers in New Zealand, Australia, and the United Kingdom.

With its unique consumer offering, skilled technical team, experienced management executives and well laid-out growth strategy, the company seems well-placed for future growth opportunities. Looking at the past performance Active customers and Active merchants in New Zealand and Australia grew at a CAGR of 96.57% and 76.88%, respectively, over the period of 1HFY19-1HFY21.

Past Performance of Active Customers (Source: Company Reports)

Past Performance of Active Merchants (Source: Company Reports)

A Quick Look at 1HFY21 Key Financial Highlights: During the period, GMV of the company stood at NZ$245 million up 167% on a year over year basis. For 1HFY21, the company reported total revenue of NZ$13.3 million, an increase of 151% year over year. Net loss for the year amounted to NZ$26.4 million. In the same time span, active merchants witnessed an increase of over 48% to 6,323 and active customers stood at 568,000. Notably, the company was listed on the ASX raising A$80 million (NZ$86.9 million) in September 2020. The company expects to use these funds to support the company’s growth in the UK, and for general working capital requirements.

Revenues Highlights (Source: Company Reports)

Decent Liquidity Position: The company exited 1HFY21 with NZ$63.1 million of total assets. Cash balance at the end of the period amounted to NZ$31.8 million driven by proceeds from the IPO, while total equity stood at NZ$50 million as on 30 September 2020. Proceeds from the IPO were used to pay down borrowings on the receivable’s facility with Kiwibank and fund UK loan book growth.

Borrowings stood at ~NZ$0.1 million, at the end of the period. Net cash outflow from operating activities came in at NZ$23.4 million, while net cash outflow from investing activities was at NZ$1.1 million. In 1HFY21, the company had an asset to equity ratio of 1.26x as compared to the industry median of 1.66x. Debt to equity for the same time span stood at 0.01x, lower than the industry median of 0.34x. Notably, the company has secured a NZ$20 million debt facility with Kiwibank to fund its New Zealand and Australian operations. The company has also secured a ~NZ$156 million debt facility with U.S. funding provider Victory Park Management to fund growth in the United Kingdom. Considering, the expanded debt facilities, and existing and new capital raised, the company remains on track with a significant GMV growth capacity. Notably, at the end of 1HFY21, total undrawn facility stood at $172 million.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Top 10 Shareholders:  The top 10 shareholders have been highlighted in the table, which together forms around 64.61% of the total shareholding. Styris (Craig John) holds the maximum interest in the company at 25.5%, followed by Rohloff (Robyn Anne) holding 14.78% of the shares.

Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)

Key Risks: The company operates in a highly competitive environment wherein new BNPL entrants or existing competitors may deliver a superior solution and customer experience offering. Further, absence of any regulatory measures and increase in subscription fees may limit the growth opportunities of BNPL players. The company is also exposed to the risk of fraud and bad debts. Further, cyber-attacks also pose a threat to the company. The company’s business is heavily dependent on consumer spending and consumer preferences, which could get impacted by the outbreak of COVID-19. Also, stiff competition from peers and foreign currency fluctuation risks add to the woes.

Outlook: The company is increasing its market share via co-branded marketing campaigns and is seeking to expand in the health, beauty, digital, travel, and ticketing verticals. It is focusing on improving operational efficiencies and merchant and consumer experience and is aiming to increase user engagement and repeat purchases through improvements to the Laybuy App. The company has unveiled Beta testing of its offering in the United States through its Laybuy Global product with certain retailers. It expects to launch the full set of testing across the US in April 2021. The company remains confident for a strong Q4 FY21 quarter, owing to unveil of numerous key programs which include “Tap to Pay” partner programme. Also, the collaboration with Prezzee to offer its customers the chance to ‘Pay in 6’ for gift cards at a huge variety of stores, primarily across Australia and the UK, bodes well for its future growth opportunities.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company continues to focus on strengthening its foothold in New Zealand, Australia and in particular the UK. As per ASX, the stock of LBY is trading below the average of its 52-week low and high level of $1.23 and $2.3, respectively. The stock of LBY went down ~12.6% in the past 3-months but went up ~2.9% in the past one-month period. On a technical front, the stock of LBY has a support level of ~$1.266 and a resistance level of ~$1.555. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered Afterpay Ltd (ASX: APT), Zip Co Ltd (ASX: Z1P), Openpay Group Ltd (ASX: OPY), etc., as peers. Considering the current trading levels, robust 3QFY21 trading update, decent liquidity position and outlook, and 1H21 financial and operational highlights, we recommend a ‘Buy’ rating on the stock at the current market price of $1.42, down by 2.069% on 15 January 2021.

LBY Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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