AFRGA1 A015

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www.afr.com | Monday 4 May 2020

Companies&MarketsAFR

InsideVirgin Bidder groups set toconsolidate p17

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Electric cars Analysts point tobattery minerals crunch p20

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Due Diligence No sure betplaying with Jumbo p30

S&P/ASX 200 Index (points)

Market snapshot

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Change -276.46 (-5.01%)Close 5245.89

S&P/ASX 200 stocks FridayBest Close ($) Change (%)

Janus Henderson 26.60 +8.17Fisher & Paykel Hlth 26.54 +4.90ResMed Inc 24.16 +3.25Blackmores 76.56 +1.06NEXTDC 8.95 +0.90

WorstAustal 2.69 -19.94Monadelphous Grp 9.65 -14.60Virgin Money UK 1.455 -12.35GPT Grp 3.81 -9.93The Star Entertain 2.73 -9.90

Indices Close (points) ChangeASX 200 5245.9 -276.5Nikkei 19619.35 -574.34Hang Seng (pm) 24643.59 +67.63Shanghai A 2997.56 +39.41

Currency ChangeTWI 56.9 -0.9$A/US¢ 64.50 -1.01$A/¥ 69.08 -0.75$A/€ 0.5841 -0.0002$A/£ 0.5132 +0.0001

Rates Close (%) ChangeCash rate 0.25 steady180-day bills 0.157 -0.00310-yr bonds 0.879 -0.014

Commodities Close ($US) ChangeGold (spot) 1685.10 -14.02Iron ore 84.04 steadyOil WTI 19.78 +0.94

Bad debts hangover Westpacdividend plans

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James Frost, Aleks Vickovichand James Eyers

Continued p19

Westpac Banking Corp may be betteroff delaying its interim dividend ormaking no distribution when it deliv-ers first-half results this morning, sayinvestors growing increasingly uneasyabout the outlook for bad debts.

Over the last week, bank sharehold-ers have begun to factor in losses fromthe COVID-19 shutdown on profits.Some estimates suggest they mayreach $45 billion over three years.Westpac said last week it would take a$1.6 billion provision in the first-half tocover the mounting cost of the crisis.

With Westpac stock down 49 percent from its 52-week high, someinvestors say the last thing shareholdersneed is a token distribution that weak-ens the bank and forces it to issue freshequity soon after its most recent $2.8 bil-lion capital raising in December.

Airlie Funds Management portfoliomanager and former head of equities atPerpetual, Matt Williams, said West-pac should take ANZ’s lead and not paya single cent when it announces its res-ults for the half to March 31.

‘‘There’s no better time to pay noth-ing. Investors are now prepared forthat outcome: preserve capital as theeconomic impact of the crisis filtersthrough the system,’’ Mr Williams toldThe Australian Financial Review.

The do-they, don’t-they dividendscenario played out last week whenANZ opted to defer a decision on itspayout just days after National Austra-lia Bank ambushed the market with aheavily reduced dividend and a $3.5 bil-lion capital raising at the same time.

Banks are being forced to balance thecompeting agendas of retirees whoown big licks of stocks for the incomestream, and instructions from theprudential regulator to materiallyreduce or at the very least defer pay-

ments until more certainty around thefinancial impact of COVID-19.

Argo Investments senior invest-ments officer Andy Forster, who over-sees close to a billion dollars investedacross the big banks and Macquarie,said over the past week he has beenforced to reassess whether Westpacwill make a return to shareholders.

‘‘We have been of the view that West-pac would pay a dividend, heavilyreduced, but still pay one with anunderwritten DRP. ANZ have obvi-ously taken a different path by defer-ring their decision – which has reallyopened the door to a range of out-comes,’’ Mr Forster said.

Australian equities manager DermotRyan, a portfolio manager at the$192 billion giant AMP Capital, said itwould be ‘‘prudent’’ for banks to holdback on dividends in the current cli-mate, given the uncertainty around theimpact of the pandemic on creditgrowth and net interest margins.

AMP – which held 10.7 million ANZshares as at Wednesday across its vari-ous investment management subsidi-aries – predicted in early April thatbank dividends would halve; a predic-tion Mr Ryan now says looks relatively‘‘conservative’’.

‘‘With a new CEO, we think thatWestpac may opt for a low dividend oreven a deferral as well,’’ he said. ‘‘Wethink that is part of the broader capitalsqueeze going on in the economy.’’

The decision on dividends will havebeen made on Friday after the marketclosed. and will be reviewed once moreearly today before the earnings release.

The announcement will be part of amuch bigger set of numbers fromWestpac chairman John MacFarlane’sand CEO Peter King’s first set of resultswhich will be carefully scrutinised byinvestors, regulators and analysts.

Westpac has already softened

Andrew Maple-Brown says Australian infrastructure stocks don’t offer the samevalue opportunities as global stocks. PHOTO: PETER BRAIG

Infrastructure on fasttrack in low-rate world

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Monday fundie Long-term ownership haspaid off for listed fund.

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Robert Guy

Continued p23

‘‘You’re spot on,’’ says Andrew Maple-Brown with a laugh when it is sugges-ted Royal Vopak is one of the best infra-structure stocks to own right now.

As the global glut of oil swelled andproducers grew more desperate to finda home for their unwanted supplies,shares in the world’s largest independ-ent owner of storage tanks soared to afive-year high in April as the scramblefor every spare cubic metre of spacebecame ever more frenzied.

‘‘We’ve been a long-term owner andthat has been a favourable benefit forus this year. The oil storage isextremely valuable,’’ he says.

The Dutch stock’s 20 per cent rallyfrom its April lows is testament to therarity value of its assets, a commontheme that Maple-Brown and his fel-low managers of the $5.2 billion Maple-Brown Abbott global listed infrastruc-ture fund look for in the 25 to 35 stocksthat make the cut in the portfolio.

‘‘We very much focus on assets withthe strongest combinations of low cashflow volatility and natural inflationlinkage. There’s about 110 companiesglobally which we believe will exhibitthose characteristics,’’ says Maple-Brown, who is also the firm’s managingdirector of global listed infrastructure.

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James Eyers

Nick Molnar says Tencent ‘‘brings a newlevel of experience’’ to his company,Afterpay. PHOTO: LOUIE DOUVIS

� Street Talk Tencent taps Goldies p16� Crunch time for Sezzle p23� James Thomson Five ways Afterpay

wins from Tencent p30

Continued p19

Afterpay’s co-founders say the Chinesetechnology giant Tencent, whichappeared as a substantial shareholderin the buy now, pay later pacesetter onFriday, will help it expand in Asia, asthe two companies consider integrat-ing aspects of their payment platforms.

Afterpay shares are expected to openhigher this morning on the back of theannouncement on Friday evening, asanalysts suggest Afterpay couldbecome a payment option in Tencent’sWeChat Pay mobile wallet, which has1.2 billion users.

The deal comes amid a spat betweenthe Australian and Chinese govern-ments after Australia called for aninvestigation into the origins of thecoronavirus, which Beijing’s ambas-

sador to Canberra warned could sparka Chinese student and tourist boycottof Australia.

But two of the biggest fintech playersin each country are forging a partner-ship despite the political fracas, withAfterpay co-founder Anthony Eisendescribing a ‘‘shared understanding’’ ofthe benefits alternatives to traditionalcredit can provide retailers and custom-ers transacting on internet platforms.

‘‘It is our business proposition thattranslates, and it’s our business modelthat’s at the core of this relationship,and the relationship we have with ourgrowing domestic and internationalinvestor base more broadly,’’ Mr Eisentold The Australian Financial Review.

‘‘The discussions we have had [withTencent] relate to global expansion.Being a retail-led company, they see the

value proposition we are delivering toretailers and how that can be expandedin more countries.’’

The $300 million investment, builtup over the past five weeks through on-market purchases after the Afterpayshare price was felled when the coro-navirus struck, will be followed by col-laboration on technology, bothcompanies said in the announcementon Friday.

Tencent processes a billion transac-tionseach dayand hasa 39per centmar-ket share of third-party mobile paymentvolumes in China. which are linked to awide array of its technology investmentsincludingretailplatforms,musicstream-ing and video gaming services, auctionsites and the retailer JD.com.

Earlier this year, its key competitorin China, Ant Financial, took a minority

stake in European buy now, pay laterleader Klarna, in which Common-wealth Bank is also an investor.

Afterpay’s other co-founder, NickMolnar, said Tencent ‘‘brings a newlevel of experience on how to scale apayment infrastructure globally, andas we improve our relationships withretailers, it provides immense oppor-tunity in other markets where theyare prevalent’’.

Tencent could provide Afterpay,which offers instalment payments,with a new funding source if that wasneeded, and help the Australian

AFRGA1 A023

AFR Monday 4 May 2020www.afr.com | The Australian Financial Review

23MarketsMonday

Crunch time forSezzle in US buynow, pay later

May Jun Jul Aug Sep Oct Nov Dec Jan20 Feb Mar Apr May

SOURCE: BLOOMBERG

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Comparative performance (%)

Land grab

Sezzle (+31.97%)

Afterpay (+8.56%)

S&P/ASX 200 (-17.24%)

Zip Pay (-35.47%)

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Tom Richardson

Sezzle’ Charlie Youakim and chief revenue officer Paul Paradis believe the US BNPLmarket can profitably support multiple players. PHOTO: WAYNE TAYLOR

For investors, the growth in the UnitedStates buy now, pay later (BNPL) sectormakes Australia look small beer.

Around $1 billion of Afterpay’s$2.6 billion in total sales came from theUS in the March quarter, with rivalslike US-centric Sezzle also growingstrongly.

Over the year to March 31, Sezzlemore than quadrupled NorthAmerican merchants and consumersusing its services to 12,715 and1.15 million respectively. Afterpay has4.4 million active customers in the US,more than the 3.2 million in its maturerAustralian market.

Overall, it’s a market that is between10 to 20 times bigger than Australia.

Yet Minneapolis-based Sezzle chiefexecutive Charlie Youakim says the USBNPL sector is still three years behindAustralia. ‘‘We’re at the early adopterphase in the US, but it’s definitelypicking up. Retailers are taking notice.They’re starting to realise they need asolution,’’ says Youakim.

The key to profitability will be howthe fintechs manage costs fixed to everytransaction. If transaction costs aremanaged, then BNPL could profitablyscale as other non-transaction-facingcosts such as staff and marketing canbe kept relatively fixed versus headlinegrowth.

‘‘When we launched in the US welooked at what happened in Australiaand noticed the biggest difference inthe unit economics between the twocountries was card processing rates,’’Youakim says.

BNPL players charge consumers’cards themselves, rather than theretailer, and pass on the cost as part of abundled fee to retailers for differentservices provided.

In the US, the fee charged by cardissuers to process a transaction is farhigher than in Australia.

‘‘In Australia, it’s regulated by thegovernment. [The fee] runs at0.6-0.7 per cent. In the US it’sunregulated, so the oligopoly have theirrun at it,’’ Youakim explains.

A typical Visa processing fee in theUS is 3 per cent. Sezzle charges retailersfees around 6 per cent plus 30 cents per

transaction, with the pitch that thisincludes the 3 per cent card fee.Afterpay typically charges retailers4.5 per cent in the US, including thecard fee.

Bulls argue the source of incomeBNPL players provide Visa andMastercard explains why they havelittle incentive to compete with ordisintermediate the sector.

In 2019, Afterpay announced apartnership with Visa given theirmutually beneficial interests. Visa orMastercard also cannot acquire

customers at online checkouts likeBNPL players, because they don’t facethe consumer, but the consumer’sbank or card issuer.

Despite this niche, bears such asbroker UBS argue the BNPL sector haslittle moat as there’s little to stop newcompetitors offering retailers lowerfees to win market share.

Another significant transaction costfor BNPL is the interest on thewarehouse funding required tomanage receivables.

Receivables balances are the vast

sums a BNPL provider borrows from abank to pay a merchant upfront, whilewaiting six weeks for the consumer topay it back with no interest charged.

The interest on warehouse funding aBNPL provider must pay for a creditline is based on periodical LIBOR inter-bank lending rates. Three-month (USdollar) LIBOR is now 76 basis pointsand a typical 30-day LIBOR rate 50basis points.

The BNPL players have benefitedfrom interest savings on warehousebalances as LIBOR tumbled in line withglobal rates. If LIBOR rose with rates itwould hurt transaction margins.

In turn, if BNPL players had toextend consumers’ credit periodsunder the COVID-19 ‘‘Team Australia’’principle of debt leniency, costs to fundreceivables increase via higher interestand longer durations. This reducesreturn on invested capital as a measureof profitability.

In its March quarter update,Afterpay controversially revealed itshortened credit duration forconsumers by making the firstinstalment payments upfront for mostAustralian customers.

The third key variable transactioncost driving how profitable the BNPLbusiness model is at scale is bad debtsas a percentage of sales.

In a bear scenario it’s possible USmargins turn negative on merchant feepressure, increased bad debts, fundingcosts, or payment-processing charges.

Broker UBS says sell Afterpaybecause margin pressure will hurt it inFY21. It has a lowly $14 price target.

Youakim dismisses fee pressure as arisk, given the business modelincreases sales and basket sizes forretailers, while giving consumers asuperior alternative to interest-bearingcredit cards.

‘‘There’s much more room to grow,’’he says. ‘‘This payment by instalmenttrend is a mega trend. Customers loveit. It’s going to continue to take hold. It’sstill early days.’’

Broker Ord Minnett says ‘‘the growthrates Sezzle is experiencing cannot beignored and the company representsthe best opportunity in the BNPLsegment’’.

It has a $3.40 valuation, more thandouble Friday’s $1.61 closing price.

Infrastructure on fasttrack in low-rate world

We still see airportsas extremelystrategic assets withhigh entry barriers.Andrew Maple-Brown,Maple-Brown Abbott

From page 15

A career in funds management wasnever a certainty for Maple-Brown des-pite the family’s pedigree within theindustry.

As a scion of the late Robert Maple-Brown, one of Australia’s most storiedinvestors, he came to funds manage-ment later in his career after working atLendlease and then Macquarie on pro-ject finance for property and infra-structure transactions.

‘‘Dad always encouraged us to haveour own careers. He was very cautiousaround encouraging us into the sectorand certainly cautious around encour-aging us into the family firm.’’

‘‘I learnt from dad the importance ofdiscipline within an investment pro-cess and the importance of being cau-tious or conservative.’’

The break into funds managementcame in 2007 when at Macquarie hedecided he wanted to make the switchfrom structuring debt to buying equit-ies. After spending time managingmoney in Sydney and New York,Maple-Brown and three colleaguesdecided to hang up their own shingle in2012.

‘‘We very much believed in the assetclass and wanted to tie ourselves to itover the long term,’’ he says.

‘‘But it is very difficult to start a firmtotally from scratch, particularly aglobally focused one. So we needed apartner.’’

While approached by other backersof boutiques, the team eventually

found its home at Maple-BrownAbbott. The four founders own 54 percent of the fund.

Maple-Brown sees ongoing demandfrom sovereign wealth funds, pensionfunds and retirees for the asset classgiven its higher dividend yield relativeto global equities, and longer-dated andlower volatility cash flows.

Opportunity is also seen in the gapbetween valuations for listed infra-structure assets and direct – or unlisted– infrastructure assets.

He cites media reports that a stake inTransGrid, which operates electricitytransmission networks in NSW, couldbe sold at 1.6 times its regulated assetbase. That compares with listed SparkInfrastructure, which has a stake inTransGrid, that the fund calculates istrading at 1.25 times its regulated assetbase.

‘‘That’s a massive differential betweenwhere the assets trade in the listed mar-ket versus where they trade when directinfrastructure investors buy them.’’

Infrastructure stocks have notproved immune from the violent selloffin global markets sparked by theCOVID-19 pandemic, which has lockeddown many of the world’s largest eco-nomies.

Airports and toll roads, which onlytwo months ago were eagerly soughtby yield hungry investors, have notbeen spared by jittery investors.

Despite the battering of stock prices,Maple-Brown is treading carefully.

‘‘Shorter term I am more cautiousaround markets,’’ he says.

‘‘While in some sectors we see whatappear to be attractive valuations atthis point in time, we’ve been prettycautious in terms of materially addingthose stocks just yet.’’

One sector the fund is watching care-fully are transportation infrastructureassets, particularly airports.

The fallout from COVID-19 couldhave an enduring impact on the airlineindustry and the infrastructure thatserves it.

‘‘There will be an impact on longterm traffic, there will be an impact onthe airlines which drives seat capacity,there will also likely be an impact onpassenger behaviour.

‘‘We still see airports as extremelystrategic assets with high barriers toentry, just not as valuable as they previ-ously were. ‘‘

While airports may struggle in apost-COVID-19 world, Maple-Brown isupbeat on the prospects for anotherpopular means of transport in Europe:rail.

The fund is an investor in UK-listedGetlink, which owns the tunnel thatconnects the UK to France.

‘‘That is very much an asset that wethink is highly strategic,’’ he says.

While the main route is London-Paris, there is also London-Brusselsand London-Amsterdam, while thereare also seasonal routes into southernFrance during summer and into skiareas in the winter.

Every passenger on Eurostar, whichis a different company, pays a fee to the

tunnel owner. That fee is escalated as afunction of inflation.

‘‘The concession goes to 2086, butthere’s very high barriers to entry,’’Maple-Brown says.

‘‘It’s still trading today around at theprice it cost to build 25 years ago. Noone is going to build another tunnel.’’

He adds there is plenty of capacityavailable on the tunnel so Getlink cancontinue to increase its revenues withvery little in the way of additional costs.

‘‘We think rail travel has some strongtailwinds: it’s far more environment-ally friendly than flying by planebetween these cities. We expect furtherdirect routes to be added into the net-work.’’

Around 55 per cent of the portfolio isin regulated infrastructure assets, espe-cially in the US and UK.

These include regulated utilitiessuch as water, gas and electricity, assetsthat are less economically sensitive andhave limited exposure to the currentuncertainty caused by COVID-19.

One stock that has caught the fund’sattention has been US-listed DukeEnergy, which offers defensive earn-ings and attractive regulated returns ina low-rate environment.

‘‘It’s predominantly a regulated elec-tricity business so it will benefit fromthe move to electrification that we’reseeing globally,’’ says Maple-Brown.

‘‘That company sold off quitesharply, At one stage it had sold off 35per cent from its peak a few weeksearlier which is very unusual from ourperspective that such a large-cap, lowbeta stock was sold so aggressively.’’

‘‘We took the opportunity to materi-ally increase our exposure into NorthAmerican regulated utilities includingcompanies like Duke.’’

He says one question that is oftenasked is why the fund has low exposureto Australian infrastructure stocks. Itcurrently owns toll road operatorTransurban and Spark Infrastructure.

Access to a broader set of infrastruc-ture, such as regulated water assets ortelecommunications towers, is oneappeal of investing offshore. Anotherissue is the valuation of Australianinfrastructure stocks.

‘‘We have a very high regard for com-panies like Sydney Airport and Trans-urban but one of the problems we findis their stories are quite well known inAustralia so we tend to see less valu-ation opportunities to comparableassets in offshore markets.’’

Maple-Brown argues what is lesswell known or appreciated is how Aus-tralian fund managers have come todominate the global listed infrastruc-ture industry.

‘‘I can’t think of another sector in fin-ance where Australia is effectively themarket leader,’’ he says, reeling offnames like Macquarie, AMP, Colonial,RARE Infrastructure, Magellan andLazard as examples of Australianfunds that have succeeded as globalinfrastructure investors,

He calculates that when the fundstarted in 2012 there was about$US20 billion in listed infrastructurebeing managed by specialists.

The capital now deployed is closer to$US100 billion, of which Maple-Brownestimates around half is run out of Aus-tralia. ‘‘Australia does have very highquality infrastructure managers. Whatis unusual about our sector is if you area US pension fund looking for an infra-structure manager, then almost cer-tainly on your shortlist will be anAustralian manager.’’