Fahour shrugs off caution as Latitude float looms

Latitude Financial chief Ahmed Fahour says owners have ‘massive skin in the game’ to ensure a successful $4bn ASX tilt.

Ahmed Fahour, CEO of Latitude Financial Services, at the company's Docklands head office. Picture: Andrew Henshaw

Latitude Financial chief Ahmed Fahour has vowed he and the company’s private equity and bank owners have “massive skin in the game” to ensure a successful $4bn ASX tilt, despite caution from potential investors.

Latitude lodged its prospectus with the corporate regulator on Thursday, as flagged by The Australian, outlining plans to raise as much as $1.4bn and deliver a bumper payday to Mr Fahour. The Latitude deal comes amid a quiet year for listings and marks the largest raising via an ASX initial public offering since Viva Energy’s float last year.

Mr Fahour shrugged off concerns about the soft IPO market on Thursday and instead focused on improved domestic consumer confidence and property clearance rates in recent months.

“The momentum is incredibly positive,” Mr Fahour said of capital markets. “The amount of demand for technology-based finance companies is skyrocketing.”

Latitude has 2.6 million customer accounts across products including personal loans, credit cards, store finance and instalments and more than 1950 merchant partners. Gross loan receivables stood at $7.7bn at June 30.

To boost confidence on the IPO, after an aborted attempt last year, Latitude owners KKR & Co, Varde Partners and Deutsche Bank will continue to own about 54 per cent of the company after the deal, with the stake escrowed until next year’s annual results.

“We all have massive skin in the game and are pretty excited,” Mr Fahour quipped.

But Tribeca Investment partners portfolio manager Jun Bei Liu said Latitude would need to undertake a “big investment” in technology to keep up with newer companies and the likes of buy-now-pay-later group Afterpay Touch.

“It is still that old GE finance business,” she said. “It is a business that hasn’t really innovated as much.”

Ms Liu did note that a decline in price expectations and lower market volatility than last year would bode well for the IPO.

“It is certainly a much better time for them to list compared to last year,” she said. “The multiple they are offering now seems much more reasonable.”

Another fund manager, who declined to be named, said he would sidestep the Latitude IPO.

“We have declined meetings on this one … We reckon we should be able to do better than this,” he said.

Mr Fahour’s total target annual pay sits at $4.8m in the prospectus and it also revealed a discretionary equity grant could be issued for a “successful listing”, the value of which cannot exceed $22.5m. He has also been granted a limited recourse loan of about $17.5m to buy shares in Latitude and is expected to hold a 0.7 per cent stake after the IPO.

The prospectus showed that KKR is expected to retain 20.5 per cent, Varde 20.6 per cent and Deutsche Bank 12.9 per cent of Latitude after the IPO.

Despite a tough two years in financial services, Mr Fahour said Latitude had benefited from the heightened regulatory climate.

“We are a really big beneficiary of the regulatory environment,” Mr Fahour said of Latitude’s capital-light model and an increase in market share in the personal loans, where the company is now the third-largest issuer of new loans.

“The majors have really pulled back and this an amazing opportunity.”

But Latitude’s prospectus outlined the risks from a tougher approach by local regulators to areas such as credit expense assessment following the royal commission, even though it said the group was “not currently involved in any material litigation” as a defendant.

The prospectus noted ASIC was “currently investigating” the application of Latitude’s processes for vulnerable customers, following concerns that credit contracts had been approved for certain indigenous customers on the basis of inadequately verified information.

Latitude was also entangled in a refund program for customers, which started in 2017, after it mis-sold consumer credit insurance and incorrectly denied claims on policies sold with credit cards.

In the 12 months to June 2020, Latitude plans to grow its technology project capital expenditure to be nearly double the fiscal 2018 spend.

The prospectus forecasts cash net profit of $287.6m for the year ended June 30, 2020, up from $278.1m in 2019 and 248.4 in 2018.