I. Sector Landscape and Outlook:
With the emergence of new business models and providers, the Buy Now Pay Later (BNPL) sector has gone great guns, transforming the consumer payments landscape. Afterpay, Flexi Group, Zip Co, and Openpay witnessed circa 55% growth in BNPL transactions and processed $10 billion of purchases in the ANZ region. As per recent public disclosures, the transaction value processed by a handful of large BNPL providers surged above 50% PcP in the second half of FY20.
Current Developments in Australia’s Macroeconomics:
Key Macroeconomic Indicators Unfold Progressive Consumer Sentiments: Amidst COVID-19 challenges and uncertainties of systematic global risks, the Australian economy registered a 1.8% QoQ and a 1.1% YoY uplift in GDP for March 2021 quarter. The real net national disposable income and GDP per capita surged by 6.1% YoY (3.4% QoQ) and 0.8% YoY (1.7% QoQ) for the same period. Additionally, the household savings ratio made a sequential fall in March 2021 quarter to 11.6% due to progressive consumer sentiments and a drop in the unemployment rate.
Key Growth Drivers:
According to the Australian Bureau of Statistics (ABS) data, Significant Recovery Warranted in Household Spending: Spending by households continues to be in the expansionary territory with 1.2% growth in March 2021 quarter. However, spending remained below the pre-pandemic levels. In addition, Australians spent more on services than on goods, with a 2.4% increase in spending on hotels, cafes and restaurants, and transport services.
Figure 1: Sharp Recovery in Household Spending with the Corresponding Decline in Saving Ratio:
Source: Based in Australian Bureau of Statistics Data, Analysis by Kalkine Group
Lending Activities have Expanded on a Macro Scale: In June 2021, the new borrower accepted loan commitments witnessed an 82.7% PcP spike in housing finance, vastly attributed to first home buyer grants, and a 16.9% PcP increase in fixed-term loan for personal finance. Furthermore, amidst a continuous uptrend in business sentiments, business finance for property purchase upheld a significant jump of 108.0% PcP.
Figure 2: Significant Boom in Housing Finance Signaling Spike in Lending Activities:
Source: Based in Australian Bureau of Statistics Data, Analysis by Kalkine Group
BNPL Sector Developments:
Key Statistics Suggest Exponential Growth Prospects: Underpinned by the shift in consumer spending behaviour amid COVID-19, the total value of transactions increased to ~$824.65 million as of 30 June 2020, up by 43% PcP. Subsequently, the number of transacting users and transactions increased by 25% and 43% PcP, respectively. Furthermore, as per additional data collected from crucial BNPL players, the proportion of transactions incurring missed payment fees declined between January 2020 and June 2020.
Significant Contribution of Electronic Payments During Pandemic: Amidst the COVID-19 turmoil, businesses and consumers were braced by online market space through a swift move by retail businesses from brick-and-mortar to online platforms. During the pandemic, online sales witnessed exponential growth from $1,855.3 million in January 2020 to ~$2,798.5 million in April 2020.
Prominent Financial Institutions of Australia are Expanding Revenue Sources with BNPL Segment: As per Australian Securities and Investments Commissions, the revenue of the top six BNPL in the review was surged by 50% YoY in FY19 and stood at $398 million. Seeking an opportunity, the country’s top banking institutions or established licenced credit providers have recently entered into the BNPL business framework. For instance –
- The Commonwealth Bank of Australia partnered with Klarna (a BNPL provider)
- Citigroup Pty Limited launched an instalment plan embedded in the bank’s credit card
- The National Australian Bank Limited integrated credit cards with BNPL arrangements
Index Performance:
The ASX All Technology Index, which houses BNPL and fintech stocks, posted 1-year returns of ~33.56% as compared to ~+25.16% by the ASX 200 Index. Burgeoning online sales, significance of cardless and touchless payment options during the virus outbreak, improving household spending, and the government’s digital initiatives helped the sector to clock healthy gains.
Figure 3: The ASX All Technology Index outperformed the ASX 200 Index in the past one year by a notable ~8.4%:
Source: REFINITIV as on 5 August 2021
Key Risks and Challenges:
Household spending showcased a significant spike in recent quarters but remains below pre-COVID levels, manifesting possibilities of spending dilution. Gradual phase-out from containment measures pose potential cannibalization of online transactions with cash transactions. The sector assumes high competition due to unbounded surcharge, promoting intensive competition among payment schemes and payment providers. Affordability and spending have to be managed as it is the key restraining factor for mass digital incorporation. Cybercrime rates may skyrocket with compromised data protection infrastructure possibilities, which may negatively impact the e-commerce sector as a whole.
Figure 4: Key Risks and Challenges in the BNPL and Fintech Sector:
Source: Analysis by Kalkine Group
Outlook:
Figure 5: Key Drivers in the BNPL and Fintech Sector:
Source: Analysis by Kalkine Group
Changes in Spending Habits: Most BNPL transactions were driven by online sales, which skyrocketed during COVID-19 containment measures witnessing a 22.3% growth in 2020. Australians have successfully accustomed themselves to digital payments and online purchasing, manifesting a structural shift in spending habits.
Digital Business Package: The government reviewed the regulatory framework of the Australian payment system under Digital Business Package, aiming for an $800 million investment in building the digital infrastructure for businesses as a part of economic revival.
Increased use of Credit Cards and Embedded Options of BNPL Transactions: Cash, as a mode of payment, has been cannibalized by online transactions, primarily via credit cards. As a result, the recent surge in credit card payments and increased integration with BNPL payment models are expected to manifold in coming years.
Investments in 5G Network Infrastructure: The Australian government announced a $20 million Australian 5G Innovation Initiative, promoting the value of 5G networks. In NBN wholesale markets, the total number of services and total Connectivity Virtual Circuit (CVC) capacity acquired stood at 8.3 million (up by 2.1%) and 21.0 Tbps (up by 6.3%), respectively, illustrating a favourable outlook.
Government Initiatives on Digital Infrastructure Front: For the Budget FY22, the government aimed at improving digital facilities in regional and remote Australia via an $84.8 million investment to expand the Regional Connectivity Program. A further $68.5 million is allocated towards additional rounds of the aforementioned program and Mobile Black Spot Program to address network outages.
II. Investment theme and stocks under discussion (APT, SZL, FCL, LFS)
After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘EV/Sales’ multiple methods.
1. ASX: APT (Afterpay Limited)
(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$36.68 billion)
APT provides technology-enabled payment solutions for businesses and consumers via its Afterpay and Pay Now services.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 13.14% on 05 August 2021. Moreover, we believe that the stock might trade at a slight premium compared to its peer average EV/Sales (NTM trading multiple) given sales outperformance and Square’s merger preposition. For the said purposes, we have taken peers such as Zip Co Ltd (ASX: Z1P), Sezzle Inc (ASX: SZL), Pepper Money Ltd. (ASX: PPM), to name a few. Considering the improved growth in UK and North America region, supportive programs & schemes, outperforming top-line and valuation, and merger related risk which may dilute returns, we give a “Speculative Buy” recommendation on the stock at the current market price of $125.260, down by ~1.114% on 05 August 2021.
2. ASX: SZL (Sezzle Inc.)
(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$1.58 billion)
SZL is a payment solutions platform catering transaction for retailers by offering short-term and interest-free instalment schemes.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 20.68% on 05 August 2021. Moreover, we believe that the stock might trade at a slight premium compared to its peer average EV/Sales (NTM trading multiple) given a significant increase in active merchants and customers. For the said purposes, we have taken peers such as Afterpay Ltd (ASX: APT), Tyro Payments Ltd (ASX: TYR), Humm Group Ltd (ASX: HUM), to name a few. Considering the improved NTM and UMS figures, near-term growth investment initiatives, and valuation, we give a “Speculative Buy” recommendation on the stock at the current market price of $7.750, as on 05 August 2021, 11:52 AM (GMT+10), Sydney, Eastern Australia.
3. ASX: FCL (Fineos Corporation Holdings Plc)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$1.07 billion)
FCL offers core systems for life, accident, and health insurance carriers worldwide with top carriers in the US and Australia.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 19.26% on 05 August 2021. Moreover, we believe that the stock might trade at some premium compared to its peer median EV/Sales (NTM trading multiple) given rising subscription and service revenue. For the said purposes, we have taken peers such as Nearmap Ltd (ASX: NEA), Computershare Ltd (ASX: CPU), LiveHire Ltd (ASX: LVH), to name a few. Considering the improved bottom-line, synergies from the acquisition of Spraoi, and valuation, we give a “Buy” recommendation on the stock at the current market price of $3.57, up by ~0.563% on 05 August 2021.
4. ASX: LFS (Latitude Group Holdings Limited)
(Recommendation: Hold, Potential Upside: Single High-Digit, Mcap: A$2.33 billion)
LFS is involved in instalments and lending business covering Australia and New Zealand. In addition, the company offers personal loans, credit cards, vehicle loans through designated channels.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 9.91% on 05 August 2021. Moreover, we believe that the stock might trade at a slight premium compared to its peer average EV/Sales (NTM trading multiple) given suppression of containment measures and improved volume expectations. For the said purposes, we have taken peers such as Bank of Queensland Ltd (ASX: BOQ), Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), to name a few. Considering the high volumes from the ANZ region, favourable cost deductions, and valuation, we give a “Hold” recommendation on the stock at the current market price of $2.350, up by ~0.858% on 05 August 2021.
Note: All the recommendations and the calculations are based on the closing price of 05 August 2021. The financial information has been retrieved from the respective company’s website and REFINITIV.
Investment decisions should be made depending on the investors' appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.
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