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The Wrap: PayPal And BNPL, Casinos, And Pathology

Weekly Reports | Sep 11 2020

This story features AFTERPAY LIMITED, and other companies. For more info SHARE ANALYSIS: APT

BNPL meets PayPal; Crown Resorts may gain market share; Market consolidation opportunities in Australian Pathology.

-UBS tries to assess the PayPal-effect for Australia's BNPL first movers
-Why Crown Resorts is the casino favourite
-Further consolidation might upset local pathology labs sector

By Mark Woodruff and Angelique Thakur

BNPL: PayPal says #MeToo

While the Buy-Now Pay-Later (BNPL) sector has provided innovative payment and credit solutions with attractive economics, there was always the risk of either regulation or competition. The latter has arrived in the form of PayPal’s freshly introduced ‘Pay in 4’ offering.

UBS runs the numbers on first-movers Afterpay ((APT)) and ZIP Co ((Z1P)), should they ‘meet halfway’ by lowering margins by around -90 basis points over five years to match the new competition. This is estimated to lower FY25 profit (NPAT) by -55% and -20%, respectively. In the uglier scenario of ‘intense competition’ (margins lowered by -140 basis points), profits are estimated to be reduced for Afterpay and Zip by -70% and -40%, respectively. It should be noted these are highly speculative scenarios.

With 26 million active merchants globally, PayPal’s merchant reach is 500 times that of Afterpay and 900 times that of Zip. This is a tad unfair on the incumbents, given their average sales per merchant is currently significantly higher than PayPal’s. This is because of a greater focus on larger merchants, notes the broker.

Nonetheless, it highlights the challenge Afterpay and Zip face to win the long tail of smaller merchants as well as larger merchants not yet on their platform. This is especially so given PayPal’s offering is significantly cheaper. The company charges merchants around 2.4% on average, versus Afterpay’s 3.9% (the average merchant fee is not disclosed for Zip's recently-acquired QuadPay). Additionally, PayPal’s offering requires no additional integration by the merchant.

Clearly a giant such as PayPal will have a significant marketing advantage. According to UBS research the company spent around A$2bn on marketing in FY19. This compares with Afterpay’s and Zip's FY20 outlay of A$71m and A$10m, respectively.

Crown still wears the crown

While Australian and New Zealand casinos have been materially impacted by the pandemic, Macquarie experts feel they provide exposure to a quicker recovery from a covid-19 resolution.

To justify this view, Macquarie shines the spotlight on resilience seen during recent trading for those casinos that have re-opened. 

While Macquarie analysts expect to see material earnings forecast revisions in the near-term, they suggest investors should focus on operating income and free cash flow rather than only earnings to account for the impact from capitalised interest and increased D&A from new developments.

Crown Resorts ((CWN)) is Morgan Stanley’s preferred casino stock. The analysts feel the market is being too negative and overly focused on the near-term headwinds. Morgan Stanley instead remains focused on Crown’s ability to gain market share in Sydney with its new casino opening in December 2020.

Acknowledging the casino will be opening in a difficult environment, Macquarie nevertheless expects share price upside, a view further bolstered when one notes the stock is trading at a -30% discount to the casino’s five-year average.

What adds to the investment case for the casino is its leverage to a recovery in VIP/International travel in the medium term, adds Morgan Stanley. It also hepls that Crown is backed by a relatively strong balance sheet.

Macquarie rates Crown as Outperform and Morgan Stanley follows suit, upgrading its rating for the casino to Overweight.

Star Entertainment Group’s ((SGR)) FY20 result coupled with trading and border travel restrictions has prompted Morgan Stanley analysts to push out their recovery forecast.

Macquarie is more positive and believes the recent favourable outcomes on The Star Sydney’s main floor tax and securing Gold Coast exclusivity at no cost should have led to a re-rating.

While The Star Sydney will face new domestic tables competition in early-2021, Macquarie sees this segment as under-penetrated currently, possibly expanding by 30% in FY25 with The Star Sydney expected to hold a 65% share.

A thorn in the group’s side is the Crown Casino opening in Sydney, highlights Morgan Stanley. Headwinds from this are made worse by a relatively weaker balance sheet and challenging return metrics for the Brisbane project.

Morgan Stanley had downgraded its rating to Underweight but Macquarie holds onto its Outperform rating.

Morgan Stanley experts are a tad more positive on New Zealand’s SkyCity Entertainment Group ((SKC)), expecting stronger trading earlier than expected. The guidance around Auckland reopening and insurance reimbursements prompts them to increase their earnings forecasts for FY21-22.

Macquarie feels earnings for the entertainment group will recover faster than peers led by the skew towards domestic rather than VIP customers with some benefits coming from the online casino.

Moreover, with growth developments drawing to a close, Macquarie believes the group will return to positive free cashflow in FY22 for the first time in five-years.

Macquarie rates SkyCity as Outperform. Morgan Stanley remains Underweight since it believes the net debt is yet to peak with returns on Adelaide looking challenged in the near-term.

Overall, Morgan Stanley prefers Crown Resorts, Star Entertainment Group and SkyCity Entertainment Group, in that order.

Foresight on 4Cyte

The news of a potential ownership change at Crescent Capital's Australian Clinical Labs (ACL) prompted UBS to analyse the situation, taking into account the current structure of the Australian commercial pathology sector, market concentration and potential scenarios going ahead.

UBS analysis points to a market that looks heavily concentrated across each State/Territory and therefore at the national level. Therefore, an acquisition by Healius ((HLS)) or Sonic Healthcare ((SHL)) for that matter will breach the Australian Competition and Consumer Commission’s (ACCC) concentration risk. This makes the broker suggest a transaction of this nature may be difficult to complete.

However, UBS highlights the emergence of a fourth player may change the game. While the ACCC may take issue with the Australian Clinical Labs tying-up with either Healius or Sonic, UBS believes the regulator may not object to a tie-up with the fourth-largest player in the sector – 4Cyte.

4Cyte currently has about 5% national share (in terms of roved collection centres) and UBS thinks a merger of the third and fourth largest competitors may make sense in terms of increasing the scale of the combined entity.

The broker highlights ACL's hospital-based pathology services and 4Cyte's community pathology services may complement each other.

Government support and the rise in spending

The Commonwealth government had provided two automatic economic support payments of $750 to eligible Australian recipients, in April and July. ANZ’s economic insights team uses its collated card data to assess the impact this may have had on spending.

The analysis revealed average spending (monthly) by 15-29-year-old payment recipients grew faster than any other age group. There was also a rise in spending by payment recipients in the 30-44 and 45-59 age groups. All the three categories (that received payments) spent more on shopping and services.

Seen from the viewpoint of recipients versus non-recipients, the study finds the average spending for a 15-29-year-old payment recipient was up 51% in July (year on year) versus a mere 9% rise for a non-recipient.

Irrespective of whether the cardholders received the $750 payments, the average monthly spending by cardholders aged 60-plus did not return to pre-pandemic levels, note ANZ analysts. 

Younger workers were more likely to be stood down or receive the JobKeeper assistance scheme and some of them got a pay rise due to the scheme. This, states ANZ, may explain the higher rise in spending by the younger cohort.

Moreover, the ones who dropped their average monthly spending the most during April and May and recovered the least in June and July were the higher-income earners. The analysts attribute this to a lack of avenues to spend, especially true for discretionary spending.

Lower-income earners, on the other hand, already had a smaller share of discretionary spending to begin with with the income having less scope to fall.

In a nutshell, monthly spending by the lower-income groups and the younger cardholders turned out to be more sensitive to government support payments which leads ANZ analysts to conclude direct household support for these groups will stimulate consumption more than for the other groups.

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