Laybuy: The latest challenger in the BNPL segment

Looking to capitalise on huge demand in the burgeoning buy-now pay-later segment, New Zealand fintech Laybuy is gearing up for a tilt at the boards of the ASX. In our view, the timing couldn’t be any better for Laybuy’s $80 million IPO, which has been priced at $1.41 per share, with $30 million in cornerstone support secured before the offer opened.

The company’s indicative enterprise value (EV) of $199 million looks attractive in our view. The stock is priced at less than half its nearest peer in Openpay (ASX: OPY), which trades at an EV of $423 million despite boasting just over half the number of Laybuy’s 472,961 active customers and around one-third of Laybuy’s 5,672 active merchants.

A look at the company’s EV/Revenue ratio leads us to believe the IPO has been priced on the conservative side, with plenty of upside. Laybuy has been valued at an EV/Revenue of 12.3x, while Zip Co (ASX: Z1P), Sezzle (ASX: SZL) and Afterpay (ASX: APT) are trading at 21.1x, 31.3x and 42.3x respectively. (These numbers may have changed)

Is there room for yet another BNPL company?

We’ve heard a lot of commentary in recent times around how crowded the BNPL market is. However, it is our view that Laybuy has a differentiated pitch with which to pursue its growth objectives, making for a compelling proposition at the IPO valuation.

Compared with Afterpay, which reserves the right to perform credit checks, we see Laybuy tackling the issue of credit worthiness head on. Laybuy leverages third-party providers such as Experian and Centrix to run credit checks on customers. Terms and conditions in Laybuy’s customer contracts align with the consumer credit exclusions in each of its key markets. As such, Laybuy remains beyond the scope of regulated consumer finance.

Laybuy has angled its offer towards a weekly repayment structure. Whereas Afterpay involves splitting your purchase into four instalments – the first at the time of purchase, and then every fortnight – Laybuy customers make six weekly payments and the merchant still receives payment up-front. This instalment structure lowers the barrier for customers to initially purchase goods.

At the same time, Laybuy also offer some flexibility. First, through currency agnostic capabilities. Secondly, users can effectively top up their credit limit for higher-value purchases by funding the shortfall up-front and splitting the remainder over their instalment plans.

We have also been impressed by the company’s deal-making progress thus far, particularly its pioneering deal with Mastercard, where Laybuy will roll out digital cards in it key markets throughout 2020. On top of all this, Laybuy has its sights set on an emerging market.

Creating its own space in the market

It is little secret that Afterpay holds a dominant position in the Australian market. While Laybuy has established a solid presence in the local market, as well as an industry-leading position in the smaller New Zealand market, we are attracted to the prospect of the UK market, which is around 2.5x the size of the Australian market and more oriented towards a higher penetration of online sales.

The BNPL industry in the UK is still at an early stage, however, we are highly encouraged by the progress that Laybuy has made to date. In a little over a year, Laybuy’s annualised gross merchandise (GMV) value in the UK has soared from NZ$14 million to NZ$200 million, spurred on amid COVID-19.

We see the IPO as a necessity to drive the next stage of growth in the UK market, where an early-mover advantage could be on offer if the company is able to execute its strategy successfully. In our opinion, BNPL companies are dependent on sequential rounds of capital to fund their receivables and promote their brand, which is what we see this IPO helping Laybuy achieve.

We note that the company has secured an £80 million debt facility exclusively for its UK growth, in addition to a separate NZ$20 million facility for ANZ operations. From our understanding, this may provide Laybuy with scope to support GMV over eight-fold current levels up to NZ$4 billion. Even if there is a temporary rise in defaults and margin contractions, it is our contention this would ease as the scale of the brand and a higher number of return customers underpin growth.

Demand pours through for the new kid on the block

Leading players like Afterpay, Zip Co, Sezzle and even Openpay have all raised funds in recent weeks through highly sought-after capital raises.

In fact, even as Afterpay’s co-founders sold down a portion of their holdings – a move that is typically viewed as a red flag in some circles – it had no issues raising $650 million from institutions in less than a day, despite having already rallied more than 1000% from its March low. Such was the demand, retail shareholders were somewhat fortunate to receive a $150 million slice of the pie.

With this in mind, we are unsurprised that Laybuy is attracting interest from funds who are looking for exposure to an industry that has been booming amid the COVID-driven shift to e-commerce, and with government stimulus proving somewhat of a safety net for many consumers.

It’s also worth noting that money has poured in for Laybuy at every funding stage. The IPO was fully subscribed in just six minutes! Yet it was just a fortnight ago that the company raised another $10 million via a pre-IPO led by Bombora Investment Management, Perennial Value Management and Saville Capital. The trio have tipped in another $30 million for the float, and were central to a separate $15 million pre-IPO at the start of this year.

Given the scale of support that has come through for the IPO, outside of another capitulation in equities markets, we think Laybuy should open as high as $3.50 per share when it lists. We placed a bid for a few million dollars in Laybuy shares, albeit we remain uncertain whether that will even be partly filled. So if you were lucky enough to secure yourself an allocation at IPO, you could be sitting on some very tidy profits come listing time.