UBS downgrades Australia’s ‘buy now, pay later’ sector as global pandemic takes hold
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Buy now, pay later tech platforms were one of the best performers on the ASX last year.
By nature, they are consumer-facing businesses reliant on strong demand side economics. So it stands to reason that the sector has been crushed as hard as any, amid one of the biggest demand-side threats to the global economy in recent memory.
Since February 21, Afterpay (ASX:APT) has fallen from above $40 to around $21 following the latest crash this morning.
It’s a similar story for Zip Co (ASX:Z1P), Sezzle (ASX:SZL), Splitit (ASX:SPT) and OpenPay (ASX:OPY).
In view of that, analysts at UBS have released updated valuation forecasts for the two largest players — APT and Z1P. The outlook is based on three forecasts for how COVID-19 will spread from the UBS economics team, which can broadly be categorised as bad, really bad and…let’s not go there.
In a nutshell, the UBS team pointed to four main headwinds in the near-term, regardless of how the virus plays out:
– A higher rate of bad debts from existing customers;
– Lower new customer growth;
– Lower transaction frequency; and
– Fewer merchant signups and possible merchant exits.
Higher unemployment is likely to lead to more bad debts under all three scenarios, although UBS said Z1P’s practice of conducting credit checks on new customers could leave it less exposed.
UBS also said both companies have the balance sheet resilience to withstand a sharp downturn.
“For Afterpay, its high level of equity funding and naturally high receivables turnover means near-term funding risks are likely low under all three scenarios,” UBS said.
The analysts said Z1P faces some increased risk due to its higher reliance on debt funding, although its receivables balance is more likely to fall in line with lower sales.
Z1P released a statement to the market this morning where it said the business remains on a strong footing following a $62m cap raise in December. However, it’s “inevitable there will be a softening in demand across certain segments such as bricks & mortar retails, travel and tourism”.
In line with the ongoing capitulation in Australian sharemarkets, both APT and Z1P, along with SZL and SPT, all crashed by at least 10 per cent in morning trade.
