Card and BNPL transactions are expected to surge as travel resumes and borders re-open thus
-BNPL expected to be the main driver of growth for
-Margin pressure could be aggravated by the need to secure a base in highly competitive markets
-Exploring potential divestment of NZ commercial business
Medium-term targets were disclosed in the first quarter update with
Macquarie believes these targets are just aspirations at this stage and the company will need to execute successfully, through both increased earnings and a higher multiple, in order to obtain material upside to the current share price.
The main disparities with the broker's forecasts appears to be in product yields, with management expecting increased interchange and customer fees will drive yield expansion in BNPL.
Yet Macquarie believes, given the competitive dynamics, this is an optimistic assumption or, alternatively, will be at the expense of growth. The broker assesses the risks stem from yield compression, a deterioration in credit quality and lack of success offshore.
The company has reiterated its focus on a blended BNPL revenue model amid a combination of consumer, merchant, affiliate and interchange fees. Australian revenues are currently split 70:30 between merchant:customer fees and
Credit Suisse expects lower BNPL volumes in FY22 and higher net losses for the short term, yet raises estimates for FY23-24 by 2-4% to reflect stronger momentum in the commercial and leasing business, and confidence in a recovery for cards.
The stock has value appeal but the broker believes margin pressure in BNPL could be aggravated by the need to secure a base in new highly competitive markets. There is also growing execution risk around international expansion.
Australian card volumes are depressed given ongoing travel restrictions yet, as many states announce their intentions to open borders, Credit Suisse is now more confident about a recovery in volumes throughout 2022. NZ card volumes were flat in the first quarter as business was affected by the recent restrictions.
The building of new technology in the
Credit Suisse is cautious about BNPL net losses in the short term because of the rising contribution from short duration products that are likely to face higher net losses as there is minimal customer history available to assess credit worthiness.
Rising volumes from new markets in the
Commercial
The commercial & leasing business is expected to double FY21 gross income and reach
Sustained momentum signals success following a shift to broker originators in SME lending from vendor financing, Credit Suisse observes, as the business carves out its position in a market that is less dominated by the major banks. The broker highlights the commercial business has been driving volume growth in recent years, although
Hence, the company is exploring a potential divestment of this business having ascertained increased interest from various parties. The division contributed
Macquarie finds it hard to estimate an appropriate multiple for the NZ business, with no historical growth information. Moreover, management was not willing to disclose any information about the potential use of the proceeds, given the balance sheet is robust and there is no corporate debt.
FNArena's database has two Buy ratings and one Hold (Macquarie). The consensus target is
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