Latitude to try Asia and another IPO

Unsecured lender Latitude will once again test Aussie investors

Plans to enter Asia will be a key focus

Latitude Financial Profile

 Latitude is the old GE Capital business that was moth balled in 2009 and kept largely in hibernation until Private Equity purchased the business in 2015 – not a good thing for any consumer lending business.

 Six years on they are on their 4th Management Group since 2015

 2.5 million customers in Australia and New Zealand – 79% of volume in Australia

 $7 billion in sales with 3.2% market share

 $7 billion in receivables with 3.4 % market share

 $4 billion in cards    --   $2850 spend         $2500 balance owing

 This is low by international standards – USA US$9500 spend and US$8052 balances, yet bad debts are on a par.

 $2.0 billion personal loans

 $425 million auto lending

 IPO Later in 2021

 An IPO in 2021 would be the third attempt for this unsecured credit company. Given the ASX markets view of other unsecured credit companies eg Flexi/Humm this is a bold move.

 The overseas plans for Asia will raise eyebrows given Australian financial companies poor past performance in the region. Following Harvey Norman into Malaysia may sound like a good move, but this ignores the competitive issues.

 Asia is the most competitive retail financial services region in the world, not only locals and regional players but all the major global companies have extensive operations across Asia.

 Add to this the cultural differences, attitudes to money and lending, between Australia and many Asian countries, this will be an uphill battle. One example – don’t expect Malaysian banks and lenders to simply roll over, nor is sharia lending an easy concept to implement for any Anglo/Australian focuses company.   

 Third time lucky for Latitude IPO

AFR Chanticleer 12th March 2021

The sale of a 10 per cent stake to Shinsei Bank and a strategic restructuring means Latitude Financial – after two failed attempts – could list on the ASX this year.

The sale of 10 per cent of Latitude Financial Group to Japan’s Shinsei Bank paves the way for the country’s largest non-bank consumer finance business to list on the ASX without having to sell a single share.

The sale to Shinsei and a strategic restructuring of Latitude’s share register means the $3 billion company now has 28 per cent of its share register classified as “free float”.

This means it can go ahead with an initial public offering by way of a compliance listing and avoid the problem it faced in 2019 when an IPO was pulled because local institutions would not stump up $1.2 billion.

A $3 billion IPO of Latitude later this year, probably in September or October, would rank it among the largest IPOs of the year alongside other proposed float prospects Pepper Money, PEXA and Chemist Warehouse.

Shinsei joined the Latitude register when it purchased shares from Latitude’s three main owners: buyout group KKR, alternatives investor Varde, and Deutsche Bank.

Under ASX rules, a company with a free float of more than 20 per cent can list without the need to sell stock to new investors. Latitude had an 18 per cent free float before the Shinsei deal thanks to institutional investors switching their stock from a private equity fund to direct ownership.

Chanticleer is not suggesting Latitude would list without KKR, Varde and Deutsche selling more stock. In fact, it makes sense to do so because it is only when a stock has a 30 per cent free float that it can qualify for entry to the S&P ASX 200 index.

The main point is that with its current share register, Latitude would not face the same issue it faced in 2019, when its IPO was pulled at the last minute despite the sale price being slashed by 22 per cent to about $1.74 a share.

That IPO attempt had three joint lead managers – Goldman Sachs, Macquarie and UBS. Chanticleer understands the JLMs were confident of gaining foreign support for the IPO, but this evaporated.

At the time there were a number of issues bubbling away which destroyed confidence in the Australian banking and finance market, including the Hayne royal commission and the emergence of buy now, pay later competitors.

The JLMs discovered that Australian institutions would not stump up the $1.2 billion in new capital to be raised in the IPO. One complication that locked in this amount was an agreement with regulators in Australia and New Zealand.

KKR, Varde and Deutsche were actually faced with a reasonably simple decision. When you own a business that makes $1 billion in operating income a year and more than $200 million in annual cash profit, there is no financial punishment from holding on until a later date.

Nevertheless, it seems KKR, Varde and Deutsche have sought a different approach to the sale of the company with the appointment of Bank of America, Credit Suisse and Jefferies as the new JLMs.

The IPO sales process is well-timed to cash in on renewed growth in sectors of the economy hit hard last year because of COVID-19.

In 2020, Latitude’s travel credit card product 28 Degrees suffered an 80 per cent decline in revenue as COVID-19 closed the borders and stopped overseas travel. The company is expecting that sales of this product will pick up as Australians start travelling.

The 28 Degrees card has proved popular because, unlike some of the big banks, it does not charge a 3 per cent foreign exchange fee.

Latitude’s instalment payments product, which is also called an interest-free credit card, did well thanks to the growth in sales at Harvey Norman, the Good Guys and JB Hi-Fi.

Strategic push into Asia

Chanticleer understands this product, which involves instalment payments over 60 months, is going to be the subject of a big strategic push by Latitude in Asia.

The company has hired Khamphanh Kittikhoun, also known as KK, to run its Asian operations and lead a major expansion in Malaysia. Kittikhoun was chief executive of GoCheck Financial Services in Asia, which is the Uber equivalent in Indonesia and Thailand. Malaysia has been chosen as the target of expansion in Asia for two reasons.

First, it is the fastest-growing location for Harvey Norman. Some believe the Malaysian operation of Harvey Norman will be bigger than Australia within three years.

Second, Malaysia is primarily a Muslim country and its Muslim citizens are forbidden from paying interest on loans or earning interest on deposits. They are comfortable using instalment payment products.

Latitude’s total loan book shrunk below $8 billion in 2020 because of COVID-19. But the company is expecting its book to grow in the year ahead, notwithstanding the persistent decline in the use of credit cards.

Latitude will boost competition in the buy now, pay later sector as part of a strategy that seeks to give away the service to merchants for free in the hope that consumers will graduate to products that make money.

Under the leadership of Ahmed Fahour, Latitude has spent $165 million on improving its systems. It now has one of the most efficient credit platforms.

This means that it should be able to lift profits as it boosts the number of consumers using its products.

It makes an estimated 20 per cent return on equity for each new instalment payment customer. Compare that with its buy now, pay later competitors such as Afterpay, Zip and Humm, which lose money.

Until about a month ago investors were happy to pay astronomical revenue multiples for these companies.

The change in sentiment has seen Humm slump to less than $1 a share, Zip fall from $14 to $8.45 a share, and Afterpay tank from $158 to $111 a share.

There is talk in the market that merchants are pushing back against Afterpay’s 4 per cent merchant fees. If that is true, it will squeeze Afterpay’s margins at the same time as it faces increased competition in Australian from Klarna and PayPal. Zip’s latest results showed its losses rising from $20 million to $139 million, despite a 54per cent “cash profit margin”.

The arrival of Latitude on the ASX will be of enormous benefit to investors in the complex and fast-moving payments world.

The world is complex because there are two tiers of regulation and myriad products, including revolving credit, instalment payments, interest-free lending, and buy now, pay later.

Latitude, Zip Co and Humm differ from Afterpay – in that they are regulated as licensed credit providers with oversight by the Australian Securities and Investments Commission.

A sharemarket listing of Latitude will lead to greater information flows among analysts and investors about what is happening in payments and the relative fortunes of credit cards compared with buy now, pay later.