Coronavirus is exacting a serious toll on the Australian economy. Already many thousands of employees have been laid off and retailers are closing stores in record numbers. Many economists are now saying a recession is inevitable.
Australia has not experienced a recession in nearly 3 decades, since before the advent of the web browser, and with recession comes an inevitable drop in consumer spending. For buy now, pay later (BNPL) providers this means a drop in transaction volumes, which feed through to revenues. We take a look at how 3 ASX BNPL shares are performing in the current economic climate.
Afterpay Ltd (ASX: APT)
Afterpay is Australia's best known BNPL provider, with some 7.3 million active customers and more than 43,000 active merchants. Afterpay shares have been hammered on recession fears, falling from a February high of $40.50 to a low of $8.90 last Monday. Shares in the BNPL provider rallied through the week, however, and were up 114% to $19.10 on Friday.
Directors have taken advantage of the share price fall to increase their holdings. Three Afterpay directors have acquired an aggregate of 34,090 shares in the company over the last week or so.
Afterpay issued a letter to shareholders shaken by the fall in the share price on 22 March, reassuring them it was not aware of any information, outside the current uncertainty in markets generally, that would have precipitated its recent share price performance. According to Afterpay, it has a business model, balance sheet, and customer base that creates a level of protection in times of uncertainty.
Afterpay said it has not seen any material impact on its business activity, the timing of instalment repayments, or transaction losses to date. The company says it has a strong liquidity position with cash on the balance sheet of $402.5 million. It has over $1.09 billion of warehouse facilities in place. This provides the capacity to grow underlying sales by an additional $15 billion above its Q2 FY20 run rate of over $11 billion.
CEO Anthony Eisen said Afterpay's service "promotes budgeting by responsible customers." The service is unable to be accessed by customers that have a single overdue repayment. "We believe the appeal of Afterpay as a disciplined budgeting tool will not be diminished and may be enhanced with changing market conditions," Eisen told shareholders.
The BNPL provider noted that there is no material concentration in its portfolio from a merchant or customer perspective. With a business model based on high-frequency purchasing and repayment rates, average transaction values are low (around $150), as are average outstanding balances (around $211).
Afterpay acknowledged it was not immune to the current 'unprecedented circumstances'. It intends to release a business operating update following the end of the current quarter, which it says will provide further details around its balance sheet, liquidity position, and what it is seeing in terms of developing trends.
Openpay Group Ltd (ASX: OPY)
Openpay listed on the ASX in December at an offer price of $1.60. Shares in the BNPL provider have always traded below this level, but reached a February high of $1.34. Since then, shares have plummeted 67% and are currently trading at 44 cents.
Openpay released an update in response to the growing coronavirus threat earlier this month, in which it said it was strongly capitalised and well placed to trade through the current challenging situation. It reported a cash balance of $45.7 million with $45 million in undrawn funding capacity available under existing facilities.
Openpay said it continues to see solid growth, with active plans growing from 513,00 to 561,000 over January and February. Over the same period active customers grew from 224,000 to 239,000 and active merchants grew from 1,897 to 1,959.
The BNPL provider noted it had a diversified position in automotive, healthcare, and home improvement verticals. This could provide a buffer to any downturn in the fast moving retail market. It said its longer plan length and positioning as a budgeting tool could prove useful in conditions where customers may need to stretch payments across longer periods.
The Openpay for Business product, which is expected to commence in 2H FY20, will provide further differentiated, high margin and capital light revenues. The product will be launched with Woolworths Group Ltd (ASX: WOW), providing technology to manage trade accounts end-to-end. Openpay for Business allows for applications, credit checks, approvals, and account management to be conducted via its digital platform.
Openpay for Business is a payment and account management system rather than a BNPL product. This will provide Openpay with diversified revenue and does not require any material funding or balance sheet support from the company. Openpay is looking to expand the product to other large merchants in Australia and the UK.
Splitit Ltd (ASX: SPT)
Splitit shares have fallen 45% from a February high of 57 cents and are currently trading at 31 cents. On 20 March, Splitit issued a statement saying it continued to see growth from new business demand, despite COVID-19.
Splitit notes that it has no exposure to consumer defaults. Its business model utilises a customer's existing credit card, and it does not engage in direct consumer financing or issue short term loans. It says it does not need to monitor and prevent payment defaults or bad debt related risks.
The company says that it serves higher income customers who are typically over 30 years old, have multiple credit cards, and on average have 70% un-utilised credit available. At a time when access to new credit will become increasingly challenging, Splitit says it will enable consumers to efficiently utilise the credit they have. "We are more relevant than ever to consumers who need flexibility in payment terms on their own earned credit," CEO Brad Paterson said.
The company said it has no operating debt and maintains a strong balance sheet. Splitit had US$16.3 million in cash as at 31 December 2019. "We do not believe COVID-19 will have a material impact on new merchant acquisition and our ongoing growth plans," Paterson said.
"Despite an environment of projected slow down in consumer spending, Splitit is well positioned for growth," Paterson added.
The company says its technology and partnerships, including with Visa and Stripe, will allow it to execute on plans which include potential strategic partnerships, new merchant agreements, and global financing facilities.
Paterson commented, "though macro-economic forces are changing around us, our differentiated solution in the market is not. Splitit is needed now more than ever."
