Buy now, pay later (BNPL); it’s been one of the most discussed ASX sectors of 2019, and it’s about to get a new entrant.

Advisory firm Shaw and Partners has been busy pitching to potential investors for Openpay, ahead of a listing slated for December.

The company runs a similar model to incumbent players, providing instalment repayment plans and deriving merchant fee revenue.

Share prices of the existing BNPL stocks have surged across the board this year. So far though, the cohort have held their gains in spite of some headwinds — namely increased competition and regulatory risk.

So Openpay joins the index at an interesting juncture, with differing opinions as to whether valuations have run too hot.

The company has over 300,000 registered customers with a merchant base of around 1,700, which includes national hardware chain Bunnings. It’s run by former CBA and Credit Suisse banker Michael Eidel, who also served as a director on the Australian Payments Council.

Speaking with Stockhead, senior investment adviser Adam Dawes said the Shaw team was “pretty much done and dusted” on a $50m pre-IPO raise from institutional and sophisticated investors.

“I think clients liked it on the back of that cornerstone customer with Bunnings, there was an added level of comfort around it,” he said.

“We got our allocations in this week and it was scaled back by 50 per cent, so there’s still been strong demand.”

Two other BNPL stocks have hit the ASX boards this year — US-focused Sezzle (ASX:SZL) and sector-adjacent Splitit (ASX:SPT), which also offers instalment repayments on credit-card transactions. They followed Zip Co (ASX:Z1P) and market leader Afterpay (ASX:APT).

Over the last 12 months, the cohort of BNPL stocks tracked by Stockhead has made a dizzying average return of 177 per cent. It’s only cooled off over the past month, with three of the five stocks in the red:

Code Name Price ($) Market Cap 1Y return 6M return
BLY BOART LONGYEAR LTD 1.85 $170.1M 110.6% 80.5%
PEA PACIFIC ENERGY LTD 1.07 $460.7M 82.1% 73.5%
VYS VYSARN LTD 0.061 $17.9M 77.1% 77.1%
WSI WESTSTAR INDUSTRIAL LTD 0.022 $13.5M 69.2% 4.8%
NWH NRW HOLDINGS LTD 3.1 $1.1B 65.5% 9.5%
MSV MITCHELL SERVICES LTD 0.059 $102.8M 57.9% -7.7%
LCM LOGICAMMS LTD 0.19 $45.2M 46.2% 2.7%
IMD IMDEX LTD 1.615 $617.0M 43.3% 63.2%
RUL RPMGLOBAL HOLDINGS LTD 0.84 $178.5M 40.0% 33.3%
DCG DECMIL GROUP LTD 0.92 $218.9M 35.3% 0.5%
MLD MACA LTD 1.175 $305.5M 34.9% 19.4%
EGN ENGENCO LTD 0.56 $175.5M 18.1% 33.4%
LYL LYCOPODIUM LTD 5.45 $213.8M 15.6% 17.9%
MIN MINERAL RESOURCES LTD 15.4 $2.9B 5.0% 5.8%
MAH MACMAHON HOLDINGS LTD 0.245 $506.4M 5.0% 37.0%
MRM MMA OFFSHORE LTD 0.175 $162.0M 0.0% -10.3%
ANG AUSTIN ENGINEERING LTD 0.205 $115.8M -10.9% 5.1%
SWK SWICK MINING SERVICES LTD 0.185 $57.9M -19.3% -7.5%
EHL EMECO HOLDINGS LTD 1.9675 $659.3M -22.4% 11.4%
CDD CARDNO LTD 0.475 $209.0M -28.6% -15.3%
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Broader themes

By traditional investment metrics such as price-to-sales, the valuations of BNPL stocks look historically high.

But it all depends on your crystal ball — at these prices, the market is effectively saying future sales are going to be a lot higher than they are now.

For example, a key narrative around Afterpay is its current push into America. “If Afterpay fully cracks the US market, then its current valuation is going to look pretty cheap,” Dawes says.

Sector advocates also tie the potential growth of the sector to other trends, such as the rise of online shopping.

While online sales still make up a relatively small portion of total retail turnover in Australia, it’s growing at around a 50 per cent annual clip.

Research from Roy Morgan found that 1.95 million Australians used a BNPL platform in the 12 months to September, up from 1.38 million the previous year.

Those gains were driven strongly by the millennial cohort between 25 and 34, who were more than twice as likely to use the service.

Conversely, sceptics point to low barriers to entry in the sector and the risks posed by increased regulation — predominantly, whether or not BNPL stocks are effectively credit providers and should be regulated as such.

For now though, the sector has shaken off those concerns. Earlier this week, Afterpay released the independent auditor’s report into its anti-money laundering (AML) controls, in accordance with an AUSTRAC Notice.

The report found that Afterpay was in breach of AML laws around customer identity checks up until the middle of last year. But in response, APT shares promptly jumped to close the day 7 per cent higher.


Investor feedback

It’s within that broader context that Shaw and Partners sought a $50m raise for Openpay from its investor base.

“When I spoke to my network of sophisticated investors, a few of them did say ‘look it seems late in the cycle and there’s already a couple of BNPL stocks on the market’,” Dawes said.

By the same token, he added that successful companies already operating in the space could act as an anchor point for potential investors, giving a frame of reference and a degree of familiarity.

“But we’ve had institutional clients as well as sophisticated investors that said ‘no, I’m happy to see this one list first’,” he said.

“My main question is when you look at the store window and you see Afterpay, you see Zip Co. How many more stickers can you get on the window?”

More entrants gives rise to another argument put forth by sceptics — a race to the bottom on merchant fees to gain market share.

For example, the revenue modelling doesn’t look quite as rosy if margins are squeezed from 4 per cent down to 2-3 per cent.

“That’s something we discussed with the OpenPay executive team, and their view is that looking at the market, there’s still room for three major players to compete,” Dawes said.

Also mitigating that risk is the potential for growth in new payment areas, aside from the early uptake in online retail.

Dawes said OpenPay had a strategic focus on establishing new merchant lines such as airlines, or service industries such as car mechanics

“There’s a lot of different sectors, so it’s about looking further afield to get market share,” he said.

“It’s not just about traditional retail channels, there’s space out there for that entrant to come in and say ‘hey we can do this in a lot of other areas.’

“So I think that’s where the growth is going to be and it’s why we had such good demand because these guys aren’t going into the same market as existing players. There’s still areas where you can get a first-mover advantage.”