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 the high growth 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

Expanding Customer Base & Increasing Presence in the UK Aid LBY: Laybuy Group Holdings Limited (ASX: LBY) is a fintech company that offers buy now pay later services. As on 18 December 2020, the market capitalisation of the company stood at ~$231.16 million. The company’s growth strategy is focused on increasing its market share in already established geographies and rapidly growing in the United Kingdom and other international markets. Further, the company intends to leverage its strategic partnerships and opportunities for platform improvements.

The company has witnessed robust growth in November 2020, thanks to the increasing numbers of consumers who are adopting its innovative payment platform. According to the company, purchases made using Laybuy’s payment platform soared 56% from the previous month and came in at NZ$71 million in November 2020. This depicts the company’s robust gross merchant value (GMV) growth which LBY witnessed throughout the year, with GMV skyrocketing 220% year-on-year to 30 November 2020. 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.

Notably, the company also saw robust growth in all three of the markets it operates, with the United Kingdom deserving a special mention. Purchases made in November 2020 using Laybuy in Australia and New Zealand soared 33%, each, respectively, from the previous month. Whereas the United Kingdom alone experienced a growth of ~78% over the same time span. The growth establishes the robust marketing strategy, conducted by the company in the United Kingdom with recent sponsorship agreements with Manchester United and Manchester City.

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. Further, the company has also witnessed a rise of 19% in active merchants with an addition of 79,300 new customers in the past eight weeks ending November 2020, who are signing up and making purchases through Laybuy. 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.

It is worth mentioning that the company has recently announced three major growth milestones. Firstly, its Tap to Pay platform has been successfully released in New Zealand following the successful launch in Australia in November mid. Secondly, 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. Thirdly, the company collaborated 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. Annualised GMV, Active customers and Active merchants grew at a CAGR of 109.17%, 96.57% and 76.88%, respectively, over the period of 1HFY19-1HFY21, depicting a continuous upward movement.

Annualised GMV, Active customers & Active merchants Trends (Source: Company Reports)

The company is increasing its market share through 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 increasing user engagement and repeat purchases through improvements to the Laybuy App. The business continues to perform with the addition of over 60,000 active customers and 1,000 active merchants since 30 September 2020.

1HFY21 Financial Highlights: During 1H21, the company demonstrated decent growth across all key metrics. During the half-year, GMV of the company witnessed an increase of 167% on the pcp to ~NZ$245 million, up from NZ$92 million in 1H20. In the same time span, active merchants witnessed an increase of over 48% to 6,323 and active customers stood at 568,000. For 1HFY21, the company reported total revenue of NZ$13.3 million, up a whopping 151% year over year. Net loss for the year amounted to NZ$26.4 million.  Net Transaction Margin (NTM) during the quarter came in at NZ$4.1 million, up 448% from the prior corresponding period. In 1HFY21, defaults reduced to 2.5% of GMV from 3.0% in H1 FY20. Notably, the company was listed Successfully 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.

1HFY21 Key Highlights (Source: Company Reports)

Liquidity Position:  At the end of the same period, the company reported a healthy cash position of $NZ31.8 million, driven by proceeds from the IPO. Proceeds from the IPO were used to pay down borrowings on the receivable’s facility with Kiwibank and fund UK loan book growth. As at 30 September 2020, total assets stood around NZ$63.1 million and borrowing of ~NZ$0.1 million. Net cash used from operating activities came in at NZ$23.4 million.

Balance Sheet (Source: Company Reports)

Key Ratio Metrics: 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 64.57% 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. 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, which could get impacted by the outbreak of COVID-19. Also, stiff competition from peers and foreign currency fluctuation risks add to the woes.

Future Expectation: 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. Amid COVID-19 pandemic, the usage of electronic, digital, and non-traditional payment methods has significantly increased, improving the outlook for BNPL players like Laybuy Group Holdings Limited. With its unique consumer offerings, skilled technical team, experienced management executives and well laid-out growth strategy, the company seems well-placed for 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 retains a market leadership position in New Zealand and a growing presence in the United Kingdom and Australia. As per ASX, the stock of LBY is inclined towards its 52-weeks low level of $1.23. The stock of LBY went down ~5.75% in the past one-month period. On a technical front, the stock of LBY has a support level of ~$1.3 and a resistance level of ~$1.46. We have valued the stock using the EV/Sales multiple based illustrative relative valuation and have 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, strong liquidity position, decent long-term outlook, and 1H21 financial and operational highlights, we recommend a ‘Buy’ rating on the stock at the current market price of $1.37, up by 3.396% on 18 December 2020.

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

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