BNPL sector faces its toughest test

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Weekly reports | March 26, 2020

This story features AFTERPAY LIMITED and other companies. For more information, SHARE ANALYSIS: APT

By Tim Boreham, Editor-in-Chief, The New Criterion

Buy Now Pay Later faces its toughest test

Perceived as based on freewheeling purchases from predominantly younger consumers, the Buy Now Pay Later (BNPL) industry faces a bad debt from Armageddon that many giddy investors say took years.

At the same time, demand for BNPL is severely constrained as discretionary spending stores close their doors around the world.

Sure, much of the trading can be done online and some for essential purposes like auto repair bills, but it’s hard to be optimistic when the jobless queues get longer – literally – .

Unsurprisingly, the five BNPLs listed on ASX have taken an almighty blow, beyond the general market decline. But as always, it should be remembered that no action is the same, BNPL players adopting various business models.

The sale was led by the gorilla sector Afterpay ((APT)) which, at the time of writing, was trading less than a quarter of its high of $ 40 on February 19. The after-payment, we add, is still worth $ 2.3 billion.

The other shares, in order of market capitalization, are Zip Group ((Z1P)), Split payments ((SPT)), Openpay ((OFY)) and Sezzle Inc ((SZL)). Consumer and commercial finance Flexigroup ((FXL)) also has a strong presence through its long established but modified Humm offering, which recently became the first BNPL provider to fund IVF procedures.

Even during the carefree days before COVID-19, BNPL shares were vulnerable to retraction given their rapid emergence. And should it be mentioned that none of them are profitable with the exception of Flexigroup, which also saw its valuation trashed?

In the case of Afterpay, the UBS broker offers an unusually straightforward valuation. “We believe the market is pricing excessive growth for Afterpay without factoring in the risks.”

On March 19, CEO Anthony Eisen said: “We are fortunate to have a business model, balance sheet and customer base that create a level of protection in times of economic uncertainty.

“We inform you that we have not observed any significant impact on our business activity and the timing of installment repayments or transaction losses to date.”

He notes that the company has $ 672 million in liquidity and $ 402 million in cash, with warehouse financing of $ 1.09 billion. He adds that the average age of a customer is 33 – a little older than those (supposedly) carefree millennials.

In the first two months of the third quarter (March), Zip’s transaction volumes increased 85% to $ 403 million. In addition, the turnover of $ 30 million has almost doubled, implying a high margin on transaction volumes.

Management said demand for bill payment funding remained robust, with easing – read crater – demand for travel and tourism services.

According to broker RBS, the main threat to ZIP revolves around the availability of financing and the increase in bad debt, although the big “warehouse” sources should take care of the former (the company is also funded by the National Australia Bank).

Zip reported bad debt of 1.79% of its debt portfolio, below management’s target of 2-2.5%.

UBS argues that rising unemployment may become problematic for Afterpay and ZIP.

However, Zip could be better positioned as it requires formal checks. In the case of its Zip Money product (advances up to $ 1000), customers are also asked if they are employed, which is handy to know.

UBS believes that Zip is more focused on daily spending than Afterpay, which focuses on lifestyle purchases.

Openpay (OPY)

With somewhat older demographics, Openpay is calling for stable arrears equivalent to 1.2 percent of claims. The receivables book was $ 95 million in 2018-19 and $ 84.4 million in the December semester

Openpay customers can borrow up to $ 20,000 for up to 24 months, with its merchants geared toward the healthcare, auto maintenance and home improvement industries.

The average purchase is $ 316 over four months.

While the initial limit of up to $ 450 is based on no credit check, the consumer needs a clean payment history for higher limits.

“We are very careful about how we view our customers from the start,” says Michael Eidel, CEO.

“We don’t see the need to change our credit criteria at this time. We will wait and see, then we will respond. “

The last BNPL stock to be listed, Openpay debuted on December 16 last year, after raising $ 50 million at $ 1.60 each.

Since investors lost two-thirds of their dough, the timing of the float exit was a bit wrong – with glorious hindsight of course.

“We didn’t know how the market would react more broadly, but it was a successful trip,” Eidel said. “The whole market has become quite tense and nervous, especially around high-risk tech companies.”

Eidel says Openpay is well served by its older buying population.

“Our performance in January confirmed the positive trends in terms of active traders, growth in client plans and repeat clients,” he said.

“We haven’t released February numbers, but we’ll likely see the corona impact on business behavior.”

Eidel has noticed a definite shift towards e-commerce, but the medium is a challenge for BNPL in terms of confronting merchants and customers.

Meanwhile, BNPL only accounts for 2-3% of all in-store purchases – and players compete not so much with themselves as with credit cards and cash.

That said, a retailer can only accommodate two to three BNPL deals because their counters are cluttered with all of the explanatory brochures and staff have to be stocked with bottles on each one.

Split payments (SPT)

The New York-based Splitit works quite differently, as its product is based on splitting a normal debit or credit card payment into installments.

As management points out: “Splitit does not engage in direct consumer finance or issue short-term consumer loans, and therefore consumer default is not a business risk of Splitit. .

“Splitit does not need to monitor and prevent payment defaults or bad debt risk and is not subject to regulatory oversight or licensing requirements associated with the new credit arrangements.”.

Splitit shares have lost about 85% of their value since peaking at $ 1.38 a year ago, but at the time of writing, investors weighing in January 2019 at 20C were still a bit in advance.

Yet in this climate of pure fear, it doesn’t appear that investors are treating Splitit’s low-risk business model any differently from others.

Disclaimer: In no case has the company mentioned to the IIR or to the author been the subject of incentives or otherwise. The views here are independent and unrelated to the IIR’s core research offering. The opinions here are not recommendations and should not be taken as general advice in terms of stock recommendations in the ordinary sense.

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