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Market wrap: Latitude Financial set to list with $4bn market value

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With the success of Afterpay and Zip, we have seen an increasing number of companies enter the buy-now-pay-later (BNPL) space in order to capture the increasing demand for these payment services.

Afterpay has risen more than 200% and Zip more than 800% in the past two years, meaning investors have scrambled to gain their slice of the action.

Given this, it's not surprising that Latitude Financial is launching an initial public offering (IPO) this month, with the float likely to be very successful for Latitude and potential investors.

The traditional financing market is feeling the impact from the growth of BNPL companies, as it is overtaking credit cards as the preferred method of payment by younger shoppers.

afterpay shares

Millennials are the leading users of these short-term loans, with almost half having already used a BNPL service, while almost 90% are aware of BNPL.

This disruption to traditional financing is changing the way consumers approach credit and, in my opinion, this area will continue to grow, as it simply makes sense.

They can be cheaper than credit cards and can fill the gap when you're caught short before payday. There is no question that this $903m industry is on the rise, with an increasing number of competitors entering the space.

In my view, Latitude Financial is well positioned for growth and has a long history of building a successful payments, instalments and lending business. Latitude is backed by Varde Partners, KKR and Deutsche Bank, and have transitioned from GE into what they are today.

Latitude have 2.6 million customers and support more than 1900 merchant partners across Australia and New Zealand, with the merchant base quite powerful given that it can deliver a strong acquisition channel.

So now let's consider how attractive the IPO might be. Latitude is issuing shares to the value of 35% of the company at a price of between $2 to $2.25 a share. On a market capitalisation basis, this will value the company at between $3.5bn and $4bn.

The price represents a price-earnings ratio of between 12 and 14 times, which in my opinion makes the asking price a little high. That said, the business model of Latitude Financial is promising and the growth profile in the BNPL area is attractive, all of which are positive signs.

Looking at the sectors on the Australian market, most have been relatively flat, although the industrials and healthcare sector have been standouts, rising about 2% for the week, with communication services not far behind. Materials, energy and consumer discretionary, on the other hand, have just fallen into the red.

Looking at the stocks in the ASX Top 100, Orora was up more than 11% after announcing a deal to sell its Australasian fibre business to Nippon Paper on Thursday. Surprisingly, Cleanaway was up around 8% after agreeing to buy failed recycler SKM. Brambles and REA were also strong performers, both up more than 4%.

The worst performers include Flight Centre, which took a dive, trading down over 10% on fears of profit downgrades due to global unrest. Financial stocks Magellan Financial and AMP also fell more than 6%.

What to expect in the market

After a strong start to the week, volatility returned, as expected, to drive the market back down to near where it started for the week. Despite all of the noise around global uncertainty, the way our market has unfolded this week is a good sign that while it is bearish, it is not overly so.

I still expect further falls this month, and with the US moving into another quarterly earnings reporting season, this may just be the catalyst for the move down into the low I am expecting.

In times like we are seeing right now, uneducated investors are falling prey to market myths and false ideas, given that many believe the market will crash soon.

It's important to understand, however, that since 1875 the Australian stockmarket has never experienced another major market crash approximately 10 years after the previous crash.

Typically, major market crashes occur at least 20 years apart. Given that the last major crash on the Australian market occurred in 2008, we can anticipate that the next major crash will happen sometime in the second half of the next decade.

So, in the short term, our market will fall to between 6400 and 6200 points into the yearly low I have been expecting before the end of October. Following this, the market will rise into Christmas and the bull run over the past few years will continue.

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Dale Gillham is chief analyst for Wealth Within (AFSL 226347). He has an Advanced Diploma and Diploma of Share Trading and Investment and more than 25 years' experience in the financial services industry.
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