Sector Update: Financial Services (BNPL Stocks)
About the author:
- Author name:
- By Richard Coles
- Job title:
- Senior Analyst
- Date posted:
- 02 June 2020, 1:00 PM
- Sectors Covered:
- Insurance and Diversified Financials
- In this note, we take a look at the current state of play for the Buy-Now-Pay-Later (BNPL) stocks (APT and Z1P) in the COVID-19 (CV19) period, so far.
- We see the initial performance of both players as robust, with the only obvious negative being some softening in sequential sales growth. However, we do believe there remains some reasons for caution, with CV19 tail risks arguably being increasingly discounted post recent share price rallies.
- For APT, Tencent taking a 5% stake in the company is a clear feather in management’s cap and provides significant optionality going forward. However, again, a ~75% increase in APT’s share price since the deal was announced might be pricing in more than the stake actually represents.
- We upgrade our earnings forecasts for both stocks by 1%-20% respectively over the next two years on improved revenue and bad debt assumptions given solid recent trend lines. We maintain an ADD rating on Z1P but move APT to HOLD, noting APT is now trading on ~27x revenue (its highest multiple ever).
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Solid initial performances
Overall, the trendlines of initial performance for APT and Z1P early in the CV19 period have remained robust, in our view. Indeed, 3Q20 sequential customer and merchant growth of 10%-15% for both players was impressive. At this stage, the only obvious area of softness in recent updates has been a decline in overall sequential sales growth. However, this needs to be viewed in the context of: the third quarter being a seasonally weaker period (2Q has Christmas); improving outlook commentary; and APT’s rapid US sales trajectory (3Q20 US sales were +40% on the 1H20 run-rate). On bad debts, APT’s loss rates have remained stable, while Z1P has seen only a mild increase in net bad debts (1.98% at 3Q20 vs 1.68% at 1H20).
Still some reasons for caution
Despite both companies weathering the early impacts of the pandemic, we still believe the current environment warrants some caution. Broader data points supporting this include: 1) Australian and US clothing and apparel retail sales falling 25%-80% sequentially in March/April; 2) large spikes in relevant unemployment rates (Australia now 6%, US 14%); 3) significant increases in bank provisioning levels; 4) a doubling of US mortgage delinquency rates in April (to 6%); and 5) potentially broader economic impacts as stimulus programs are wound back. While we also don’t discount reasons for optimism as countries open up, less favourable scenarios do appear increasingly discounted in current valuations.
Tencent – a great outcome but a lot of upside now priced in
Tencent taking a 5% stake in APT is clearly a feather in management’s cap and provides significant optionality going forward. More bullish scenarios include APT becoming a payment option on Wechat Pay (1.2bn users) and potential access to newer markets, e.g. HK/China. However, again these scenarios need to be weighed up against a ~75% increase in APT’s share price since the announcement and potentially more mild partnership outcomes (i.e. Tencent is a prolific investor, access to its networks is not assured).
Downgrading APT to HOLD
We upgrade our APT/ZIP earnings forecasts by 1%-20% respectively over the next two years on improved revenue and bad debt assumptions based on solid recent trends. We move APT to a HOLD recommendation on valuation grounds with the stock now trading on ~27x revenue (its highest multiple ever), but we maintain an ADD recommendation on Z1P (Login to view target prices) where we see better relative value.
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