Latitude’s $3 billion float – should you invest in this year’s biggest IPO?

Posted: 11 October 2019 2:59 pm
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We take a look at what the analysts are saying about Latitude Financial's much hyped IPO.

Update 14 Oct 2019: As of Monday, the target share price was lowered by another 11% to $1.78. The target market cap is now $3.1 billion, down from its previous estimate of $3.5-$4 billion. This article has been adjusted with the new details.

The upcoming billion dollar public listing of Latitude Financial is set to be the biggest of the year in Australia, so there’s no wonder it’s also one of the most talked about.

Latitude, which is a fintech and one of Australia’s largest non-bank lenders, is targeting a market cap of up to $3.1 billion dollars. If all goes to plan, it's set to list on the ASX on October 18.

Initially advertising a share price range of $2 - $2.25, the word was out by lunchtime Friday, that the company had decided to fix the price at the very bottom of the range, at $2 a share, following “investor feedback.” As of Monday, the price fell by 11% to $1.78.

Read more: What is an IPO and how do you invest in one?

The news comes on the back of an underwhelming three-star analyst rating by Morningstar last week (even at $2), pointing to risks such as growing competition from buy now pay later (BNPL) players like Afterpay and Zip Pay, and the view that the business is "highly leveraged".

It also flagged the likelihood of capital losses should Australia’s economy continue to slow and the potential for further financial regulation in the wake of the banking royal commission.

As one of the biggest listings in recent history, the IPO was bound to face scrutiny. We’ll get back to what the analysts are saying below, but first, here’s the key data to know:

Latitude Financial IPO key statistics
Indicative share price $1.78 (prev. $2 - $2.25)
Dividend yield 4.5 - 5%
Total number of shares available under the offer 622.4 (millions)
Proposed ASX code ASX:LFS
Target market cap $3.1 billion (prev. $3.5– $4 b)
Offers open to broker customers 4 October
Broker firm offer closes 14 October
Bookbuild to determine final price 16 October
Expected listing on ASX 18 October
Expected transfer of shares (allotment date) 23 October 2019
Settlement of the offer 5:00pm, 22 October

Source: Latitude Financial prospectus, 11 October 2019

If you're interested in participating in the IPO, you have until October 14 to do so – after this date you can buy shares once it's listed on the ASX on the 18th. There are around a dozen or so brokers offering IPO participation (brokers may chose to cancel or close the offer before the advertised date). Brokers offering include:

According to Latitude's prospectus to investors, the company owners – Deutsche Bank, KKR, Varde Partners – will be holding onto 54% of the shares.

Is this good? Bad? It depends. On the one hand, it shows confidence in the ability to grow the company from those at the wheel. But the pressing issue for retail investors is not knowing when these stocks may come to market and to what degree.

CMC Markets analyst Michael McCarthy told Finder that with such a large portion of stock waiting to come to market, it's hard to drum up investor enthusiasm.

"That sheer overhang in my view limits the potential for share price appreciation," he said. The question being that if profits head South, how much will an offload of shares by the ownership pull on the stock price?

What is Latitude?

Is the company a fintech, a lender, credit card provider or a BNPL platform? It’s a bit of everything which, while being a strength, is also one of the reasons investors and brokers alike are wary.

With around 2.6 million customers, the company is big. It offers a long list of financial products – often under different brands – such as the 28 Degrees credit card and Gem Visa card, along with loans, insurance and payments tech.

In the prospectus, the company chairman wrote to investors: "Latitude is a leading digital payments, instalments and lending platform," which is "investing significantly in technology, which remains a source of competitive advantage and will enable Latitude to further innovate its payments, instalments and lending products."

But the recent focus on digital tech by company stakeholders, rather than its core financials business, has mostly come across as marketing spin for investors – whether warranted or no.

ASX technology stocks have done incredibly well in the last couple of years. Listed sompanies like Afterpay, Wisetech and Appen have seen prices jump by more than 90% in the last year alone, while the growth of traditional financial companies has been less exciting.

“They’re really positioning themselves by highlighting the technology aspects of the company," Burman Invest portfolio manager Julia Lee told Finder.

“The big question for investors to weigh up is whether this is a traditional finance company, and should be valued on traditional multiples, or whether this is more a high growth tech company.”

With a forecast profit growth of around 4.7% this financial year, she said the company growth is more in line with a traditional banking and finance company.

Why is it going public?

One of the most important questions for any investor considering an IPO is what the motivation is behind the company’s push to go public.

This is especially key in the case of Latitude because it’s not the first time the company has attempted to list. Last year Latitude cancelled its plans for a $2 billion raising – citing a change of CEO and the fallout from the royal commission.

It begs the question – why now?

In an interview with CommSec last week, CEO Ahmed Fahour said it's part of the drive into the payments tech space following the recent acquisition of the New Zealand fintech Genoapay.

The move was marked by last month's long awaited step into the BNPL space with its merchant partner Harvey Norman.

It’s one of the more exciting areas for the company – and its $0 fee offer until February next year goes some way towards explaining dampened profit growth this year.

But CMC Market analyst Michael McCarthy says the timing of the IPO raises a few red flags.

“When the company is being brought to market by current stakeholders, there are concerns,” McCarthy told Finder.

“These are the people who know the business best. They own it, they work in it. Clearly they’re going to pick the best time to bring that to market for them to maximise the share price.”

What are the positives?

In McCarthy’s view it’s not a rush and buy, but there are a few positives. Along with a decent dividend yield of 4.5 - 5% (assuming everything goes to plan), McCarthy thinks its position in the short-term lending space is a strength.

McCarthy compares it (favourably) to the unsuccessful Ram’s public listing, which faced the liquidity consequences of long-term borrowing as Australia entered the GFC.

That's not the case here. The lending is much shorter term, it's better matched to their funding model,” said McCarthy.

Lee also thinks the listing warrants some interest, especially if it sees further partnership deals moving forward, but its value won't be clear for another 12-18 months.

According to broking firm Morgans, one of many firms offering the IPO to customers, the list of positives includes:

  • Earnings growth (NPAT) of 7.6% in FY20.
  • Strong entrance to the BNPL space with backing by major retailers such as Harvey Norman.
  • Its solid market position in the consumer finance space.
  • Rebranding strategy and positioning under new CEO.
  • Potential for stronger growth than the major banks.

If you want to buy shares in Latitude Financial once it’s listed, you can take a look at our comprehensive guide to buying shares.

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