Should we buy into the Latitude Financial IPO?

The biggest ASX IPO for 2019 is set to be Latitude Financial which has come back into the fray after it’s failed attempt a little over 12 months ago. Latitude is a consumer finance business  which generated the bulk of earnings from teaming up with the likes of Harvey Norman offering interest free terms on TV’s, washing machines and the like.

Latitude now also offer personal loans, car loans, LatitudePay which is a buy now pay later competitor to ZipCo (Z1P) and Afterpay (APT), however the bulk of their current earnings still come through the old channels with 58% of income from old style  installment products, 28% coming from personal loans, and from what I can tell, only 1% from buy now pay later channels.

The business was bought off GE Capital in 2015 by a private equity syndicate led by KKR for $8.2b – around $6bn coming from the syndicate leaving a little over $2bn in debt. Now the PE money is looking to cash in – sort of. The syndicate will retain a little over 50% of the company, looking at a total valuation for Latitude of $3.6-$4b, around a 35% loss on the PE money so far, leaving room for about $1.6b of new money as KKR and friends take some cash off the table.

Early indicators suggest demand lies in the lower half of the range, which correlates to a PE of around 13x based on their expected calendar year profit of $278m this year. Pitch documents have Latitude growing earnings at around 12% on 2018 which screens cheap on 13x however the market appears to have seen straight through the re-branding and we’re hearing demand may be lower than hoped. They remain mostly an unsecured lending business with an aging model, although they are trying to address this.

Stock is available through Bells, Morgans, Wilsons, CBA, Crestone & Macquarie. The deal is largely the same as last year – the biggest change is the new CEO, ex-public enemy number 1 Ahmed Fahour of Australia Post fame. It’s still searching for a $4bn valuation which last year had them on a higher PE than the banks. Now that the banks have seen their PE expand, maybe investors will be a little more open to moving money into a riskier version and a smaller multiple.

We are not buying into this float.