Boost for IPOs as Ahmed Fahour’s Latitude Financial soars on debut

Latitude Financial’s shares climbed on their first day of trading, providing a boost to this year’s busy IPO pipeline.

Latitude Financial, led by Ahmed Fahour, began life on the ASX. Picture: NCA NewsWire / Ian Currie

Latitude Financial’s shares climbed on their ASX debut, providing the burgeoning initial public offering pipeline a boost and marking the local bourse’s third-largest float this year.

The IPO was an important milestone for Ahmed Fahour-led Latitude, after it had failed on two prior occasions to convince investors of the merits of the consumer finance and instalment payment group and its ASX listing plans.

The stock soared as high as $2.99 in early trading on Tuesday, from its $2.60 listing price, before retracing some ground to close 4 per cent higher at $2.70.

The IPO raised $200m and delivered Latitude a valuation of $2.6bn, which by Tuesday’s close had risen to $2.7bn.

That makes the Latitude deal the third largest IPO on the ASX by proceeds raised this year, behind meal kit group My Food Bag — which listed on the New Zealand exchange as well as the ASX — and flower wholesaler Lynch Group, according to Refinitiv.

Latitude has 2.77 million customer accounts across Australia and New Zealand.and its retail partners include Apple, Harvey Norman and JB Hi-Fi.

Cyan Investment Management’s Dean Fergie noted that he had some concerns about the non-bank lending sector, but highlighted positives including Latitude’s scale, track record and balance sheet.

“It probably does reflect that investors are relatively upbeat,” he said, cautioning though that lending businesses still had to navigate a period without as much COVID-19 government support for borrowers.

“We are at a bit of a cross roads,” Mr Fergie added.

Ethical Partners’ investment director Nathan Parkin is similarly being cautious on non-bank lenders, noting they were benefiting from very low wholesale funding costs during the pandemic.

“The current low level of the cost of funding is unlikely to persist for a long time,” he said. “We don’t know when that is going to change and it brings a layer of risk.”

A spate of non-bank lenders are considering joining the ASX in 2021 including SocietyOne, Pepper Australia, Grow Finance and Columbus Capital, which is rebranding ColCap. If they pull the IPO trigger, they will follow the 2020 floats of Liberty Financial, Plenti and Harmoney.

Liberty is trading above its listing price, while IPO investors remain underwater at Plenti and Harmoney.

Mr Fahour said he was positive on the economy and Latitude’s prospects in the second half of 2021.

“We are really exited and looking forward to the second half of the year, as the vaccine rolls out,” he added.

“For the non-bank financial services players there is plenty of opportunity to compete and offer great service and to grow their business.”

Mr Fahour said in personal lending Latitude was now the third largest player in Australia — up from fifth several years ago — after overtaking National Australia Bank and ANZ.

But Latitude’s profit for 2020, against the backdrop of the pandemic, fell to $128m from $158.4m a year earlier. Cash net profit fell to $223.9m for 2020, versus $274.2m in the prior year.

Mr Fahour noted that Latitude’s loans in hardship had already returned to pre-COVID-19 levels, and he was comfortable on the outlook given the company’s approach to credit assessments.

He said Latitude did a credit screening of all customers’ ability to pay, including in the buy now pay later space where others were not conducting checks.

“Some form of responsibility and responsible action is required (for the BNPL industry) whereby we need to do at a minimum a credit check,” he added.

Mr Fahour said of just under one million BNPL applications last year Latitude approved just 350,000 customers.

“We would love to support these customers but it seemed from our credit assessment they weren’t able to meet our criteria to get a couple hundred dollars worth of credit.”

Several of the big banks including Commonwealth Bank have called for tougher regulation of the BNPL industry, arguing that the product is credit.

The Latitude listing leaves joint private equity firm owners KKR & Co, Varde Partners alongside Deutsche Bank with a combined 66.3 per cent stake in the company. That holding is subject to voluntary selling restrictions under escrow arrangements, which stipulate three tranches of share selldowns are allowed, the last being after Latitude releases its half-year financial results for the period ending June 30, 2022.

The prospectus said assuming a 2021 result consistent with 2020, directors anticipated the first interim dividend would be about 65 per cent to 70 per cent of forecast cash net profit. That is equivalent to about $79m, or 7.85c per share, payable in October 2021.

Japan’s Shinsei Bank agreed to purchase a 10 per cent stake as part of the Latitude IPO transaction, a portion of which is subject to Foreign Investment Review Board approval.

Other large investors in Latitude’s float include private markets firm Hamilton Lane and the Oatley Family’s Balmoral Financial Investments.

Mr Fahour’s shares in Latitude — worth more than $7m — are also subject to selling restrictions.

On Monday, he said Latitude wanted to disrupt the major banks, but also saw scope for partnerships with the big players as they retreated to their core markets.