Latitude Financial Group’s prospectus, which was launched last week, aims to sell a picture of a company that is well positioned for growth. But what emerges from the offer document is a business that has focused on efficiency, rather than growth or innovation, under its private equity owners. And its modest growth in receivables and income is a reflection of the low-growth consumer finance market it operates in.
The company forecasts that gross loan receivables will have increased at a compound annual growth rate of 5.4 per cent between 2016/17 and the end of the current financial year. Operating income is forecast to grow at 4 per cent a year over the same period.
The company is operating in a market that has stagnated over the past few years. Data from the Australian Bureau of Statistics and the Reserve Bank shows no growth in the personal finance market for some time.
The only growth segment is the buy now pay later market. Latitude entered that market earlier this month, so it remains to be seen how it goes. It is worth noting that few of the providers of buy now pay later products are profitable.
Latitude is offering 622 million shares to investors. With the price expected to be between $2 and $2.25 a share, the company is aiming to raise between $1.24 billion and $1.4 billion.
The broker firm offer opens on October 4, with the bookbuild to determine the final price.
With a total of 1.77 billion shares on issue at the completion of the offer, the company’s market capitalisation will be between $3.55 billion and $4 billion.
The current owners, KKR, Varde Partners and Deutsche will continue to hold around 55 per cent of the company. Chief executive Ahmed Fahour will hold 12.6 million shares.
The bulk of the proceeds of the IPO, $930 million, will be used to repay shareholder loans.
According to the prospectus, the company has 2.6 million customer accounts (1.9 million of them active) and more than 1950 merchant partners in Australia and New Zealand.
Merchant partners include Harvey Norman, Apple and JB Hi-Fi.
The company says it has a diverse funding profile, with $1.4 billion of undrawn facilities.
The product range includes instalment payment products, credit cards and personal and motor loans. It also has a consumer credit insurance business, Hallmark.
Latitude was formerly owned by GE, which built a consumer finance business in Australia and New Zealand by acquiring Australian Guarantee Corp from Westpac, Avco Financial, Nissan Finance and Coles Myer store card. GE sold the business to its current owners in 2015.
Most of those acquisitions and product launches were in the 1990s and early 2000s. The company has not been as active in terms of product development and acquisition in recent years.
Under its current owners, it has expanded its funding base, increased its online capability and rebranded. The prospectus says: “Latitude has invested significantly in its technology and systems since 2015. It has implemented new systems which are integrated across front end and back end technology platforms.”
The focus has been operational efficiency. It has retired legacy technology systems, closed down its branch network, reduced headcount and renegotiated service contracts.
The company believes it is well positioned to participate in growth in the interest-free instalment payment market. Australian consumer used one of its products to make one million interest-free transactions in the year to June.
The financial statement in the prospectus shows that the company provided $9.2 billion of finance during the year to June – up from $8.8 billion in 2017/18.
The value of gross loans and receivables at June 300 was $7.8 billion.
Net interest income for the year to June was $954 million, compared with $882.9 million in 2017/18. The company is forecasting net interest income of $984 million in the current financial year.
The loan impairment expense in the year to June was $253.6 million – unchanged from the previous year. Impairments represented 3.25 per cent of gross loans and receivables.
Pro forma net profit for the year to June was $164.4 million – down from $174.8 million the previous year. Cash profit was $278.1 million, compared with $248.4 million the previous year.
The company operates on a cost-to-income ratio of just over 40 per cent and its return on equity is around 20 per cent.
It plans to maintain a dividend payout ratio to 55 to 75 per cent of cash profit. The price to earnings multiple will be between 12.4 times and 13.9 times.
The prospectus provides a long list of key risks from the evolving regulatory environment. These include possible restrictions on the sale of consumer credit insurance, the removal of the point of sale advice exemption and the introduction of responsible lending rules to cover instalment payment arrangements.