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 in 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

LBY Rides on Decent Liquidity Position & Geographical Expansion: Laybuy Group Holdings Limited (ASX: LBY) is a fintech company that offers buy now pay later services. 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. 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. We believe that the company remains on track to achieve its long-term goal of creating a global brand and strengthening is positioning as a leading Buy Now, Pay Later provider in the market.

In 1HFY21, the company showed decent growth across all key metrics. During the half-year, Gross Merchandise Value (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 period 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. 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.

Trend Showing Income by Region & Income by Type (Source: Company Reports)

3QFY21 Key Highlights: Recently, the company reported 3QFY21 results, where in the Gross Merchandise Value (GMV) came in at NZ$182 million, which skyrocketed 184% from the prior corresponding period. Revenue for the quarter went up by 157% as compared to the prior corresponding period and came in at NZ$9.5 million. Notably, revenues went up ~30% on a quarter over quarter basis. NTM during the quarter came in at NZ$2.3 million, up 230% from the prior corresponding period. Gross Losses as a percentage of GMV increased from 1.6% reported in the previous quarter to 2.8%, indicating the substantial increase in new customers and subsequent GMV growth (119,000 additional active customers). During the quarter, transaction processing costs reduced to 1% from 1.2% on a sequential basis, owing to increased GMV contribution from the UK vs ANZ region. Further, the onset of Black Friday and holidays sales, ANZ GMV continues to grow depicting increased frequency of purchasing by existing customers. Annualised ANZ GMV skyrocketed 63% on pcp. 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 436% in UK active customers and a 427% increase in UK active merchants, during the period. 

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

Decent Liquidity Position: 1HFY21, the company had 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. 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. 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. Cash held by LBY at the end of 26 January 2021 came in at NZ$19.3 million, an increase of NZ$5.9 million from 31 December 2020.

Growth and Liquidity Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 60.39% of the total shareholdings while the Top 4 constitutes the maximum holding. Mawer Investment Management Ltd. holds the maximum interest in the company at 10.31%, followed by Invesco Advisers, Inc. holding 8.99% of the shares, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Chart Created by Kalkine Group 

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: The company is increasing its market share co-branded marketing campaigns and is seeking to expand in 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 strongly with the addition of over 119,000 active customers and 1,600 active merchants in 3QFY21. It expects to launch the full set of testing across the US in April 2021. The company remains confident of a strong Q4 FY21 quarter, owing to unveil of numerous key programs which include “Tap to Pay” partner programme. 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 offering, skilled technical team, experienced management executives and well laid-out growth strategy, the company seems well-placed for future growth opportunities.

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

Data Source: Refinitiv, Thomson Reuters, 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.

**1 NZD = 0.94 AUD

Stock Recommendation: Over the last three months, the stock was down by ~10.73%. The stock made a 52-week low and high of A$1.23 and A$2.3, respectively. On the technical analysis front, the stock has a support level of ~$1.278 and a resistance level of ~$1.484. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company can trade at a slight discount as compared to its peer average, considering its stiff competition from peers, foreign currency fluctuation and higher operating expenditure. 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, strong liquidity position, decent outlook, and 1H21 financial and operational highlights, we recommend a ‘Buy’ rating on the stock at the current market price of $1.330, down by 0.747% on 05 February 2021.

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

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