Off The Charts! 20% BNPL bump, $2bn F45 IPO, $1.178 trillion equity flows

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Fitness fanatics rejoice! It's time to share in the blood, sweat and tears of F45 as the gym franchise leans into an IPO. The $2 billion, Aussie-founded company is looking to launch in the US and we've got the highlights for you here. 

Meanwhile, markets are abuzz about BNPL. Rumours are zipping around and it's tipping a few more curious investors behind a mystery rally. We look at what's behind the moves. 

And, we have the latest on Sydney Airport (ASX: SYD) as analysts and investors try to work out fair-value for the rare infrastructure asset. 

Plus, skip ahead to our best contributor stories of the week, including the low-down on a2 milk and the best stock picks for FY22. 

Let's jump in... 

#1  Rumour has it... BNPL is Zip-ping higher

Typically, when a company’s share price jumps it’s on the back of good news, such as supportive economic conditions or an analyst upgrade. This wasn’t the case for BNPL player Zip Co, whose share price has shot up more than 20% since Wednesday. 

While investors are now rejoicing after experiencing a depreciating share price since February, the market is wondering – what drove this spike in performance?

Source: Google stocks. 

But really, the reason behind the performance is a rumour. Yep, you heard me! While there’s no official news and mere speculation is exciting investors, the rumour, should it become a reality, is big for Zip. Klarna, which is almost double the size of Aussie favourite Afterpay, could be eyeing a 4% stake in Zip Co worth $160 million.

According to the Australian Financial Review, a strategic investor is among those on Zip’s share registry and all eyes are on Swedish based BNPL company Klarna, which is jointly funded and shares ownership with CommBank in Australia. Not only is this exciting for Zip investors, but it will work towards consolidating what has become a very busy market sector.

A combo between Zip and Klarna could see all types of opportunities for Australia’s silver BNPL player including global exposure and opportunities, extra funding and supervision and perhaps even enough international exposure to finally give Afterpay a run for its money. Afterpay's share price followed suit and grew around 6% at the close yesterday... before a reality check this morning shook a few investors loose. 

Source: Google stocks. 

#2 The price is right: what is Sydney airport worth?

2021 has been rife with M&A activity, headlined by bids for Tabcorp, Crown and Bingo. In May, Glenn Freeman reported that the M&A party was just getting started. And boy he was right.

On Monday, eyebrows rocketed as a 30% price rise for a sleeping infrastructure giant hit our screens? Surely not…

But our eyes were not deceiving us. This offer for Sydney Airport from an IFM Investors-led consortium sent markets into a frenzy. The $8.25 per share bid implied an enterprise value of $29.8 billion for the infrastructure asset, and if successful will be the largest deal in Australian corporate history on an EV basis.

Ally Selby recently sat down with three fundies to unpack the key details of the offer. While the bid-valuation appears to be around fair value, there was a notably absent premium for control. 

“In a world of scarce infrastructure assets, super funds should pay a premium," says WaveStone capital senior analyst Kirsty Mackay-Fisher.

Since then, Macquarie analysts have set a price target of $8.50 per share, a premium that should satisfy the interests of the board to facilitate a scheme of arrangement. A Macquarie led consortium is also reportedly considering lobbing an offer through their Infrastructure and Real Assets division.

However, uncertainty around the COVID-19 outlook and geopolitical tensions with China is denting optimism about the asset’s recovery, meaning it may be years before Sydney Airport’s passenger numbers can return to ‘normal’. In the Australian Financial Review, Anderson Chow from Jarden highlights this sentiment through a ‘sell’ rating and price target of $4.90.

We will be watching this space intently to see what developments fly through over the next few days.

#3 AUSSIE FITNESS CULT MAKES RUN FOR $2 BILLION LISTING

This Wednesday, Aussie fitness chain F45 Training filed its preliminary prospectus to the US SEC. The IPO seeks to raise $371 million at a price between US$15 and $17 per share. That would put the firm's valuation at a cool $2 billion, with key shareholders, including founders Rob Deutch and Adam Gilchrist, to retain 72% ownership in the chain.

As is the case for most Aussie success stories, the quest for US domination is on. If you have met one of their rabid fans you would know that the claims of F45's cult status are far from an overstatement. Charging around $65 a week here in Australia, F45 reports that members attend their gyms on average three times per week. 

This is a stark comparison to the global average of once per month. With fees so high, members often feel like they are throwing money away not to attend, a deliberate part of management's strategy.

The company's not-so-secret weapon to growing its name is a US$110 million investment and promotional agreement with Mark Wahlberg, who claims in the firm's prospectus to have fallen in love with the energy and sense of community the chain provides.

F45 franchises and total studios sold (Source: F45 preliminary prospectus)

Heartwarming isn't it, but what are the numbers? F45 is still loss-making. 

  • Store closures in 2020 resulted in the group netting a loss of $US25 million. 
  • Down from 2019's loss of US$12 million. 
  • The majority of the group's revenue is currently derived from the sale of franchises (totalling 62% of revenue in 2020), with franchisees paying a fixed rate to the group for the rights to operate and own that club. 

The group is in the process of transitioning into a revenue-based fee model, where franchisees will pay a percentage of revenue gained from members to the group, hoping to leverage the chain's viral customer growth into bigger profit margins. The main avenue for growth is anticipated to come from an expansion of their studios worldwide, but any anticipation of when profitability might arrive has been left out.

The timeline for listing is yet to be finalised, but what is certain is that F45's listing marks another homegrown success story punching above its weight as it makes a run for a US listing this year.

#4 Mo' money, mo' problems for markets

If the 2020s were a word, it’d be "unprecedented." This hysteria has seeped into markets with the advent of meme stocks, but we were not expecting numbers like this.

Per Goldman Sachs, the first two quarters of 2021 had the highest quarterly equity flows in history, with the first quarter almost double that of the second. 

Annualised, this implies net equity flows would be greater than the total flows over the past 20 years.

It is important to keep in context that the annualised figure assumes that cash will continue flowing into equity markets at an equally ferocious rate. History may speak for itself though:

"Since 1928, if the S&P 500 is above >10% in 1H, then 2H performance is nearly 2x the median final 6 months for all years." - Scott Rubner (Goldman Sachs) via Zero Hedge

All of this interest has pushed global assets under management past $US100 trillion, rising 11% through last year. On the back of market momentum and record levels of stimulus, “everyday investors accounted for 4.4 per cent of the net new capital, twice as much as institutional investors.”

This represents a positive for fund managers, who take fees for both the assets they manage and the performance. However, the advent of cheap, passive investments is compressing profit margins.

“(Passive funds) account for more than a fifth of global assets under management, nearly double from the 12 per cent recorded in 2009, but deliver only 6 per cent of fee revenue.” – Koen Alfrink (BCG) via AFR

The best fundies will prove their worth through consistent outperformance, while those found to be lacking will be “an easy target from an M&A perspective.” 

#5 RBA bond market tapering AHEAD

This is one you're going to want to watch. The RBA's stimulus package has been a source of contention among leading economists and investors. The will they / won't they debate around QE tapering comes down to this... if monetary policy tightens, will we see an equity market drawdown? 

The RBA has flagged they will extend its bond-buying program, but the slowed pace of buying suggests there is a gradual unwinding on the horizon. 

The $200 billion bond buy-up ends in September and after this, the RBA flagged it will continue to purchase bonds at a rate of $4 billion per week until mid-November, down from $5 billion per week in the current program. 

Gareth Aird, CommBank reported: 

"We believe we will be at a point in the business cycle late next year where normalising monetary policy by increasing the cash rate will be the appropriate move from the RBA. Today’s announcement by the RBA is a small shift in that direction."

Today, Aird reported CommBank's Global Market Research team are expecting the RBA to announce a further taper at the November board meeting, at $3 billion per week from November to February. It is predicted to extend into May 2022, at a further reduced rate, according to CommBank. 

It all seems to move slowly... but Westpac announced this week they're predicting the Reserve Bank of New Zealand (RBNZ) to hike interest rates in November this year. Their previous prediction was August 2022. 

Whatever happens next, equity markets have long learned that the maxim "Don't fight the Fed" applies here too. 

Contributor stories of the week 

Coming up next week... 

  • This week on Buy Hold Sell, small-cap experts Emanuel Datt and Shane Fitzgerald analyse the winners and losers of FY21. Plus, they name their #1 pick for the months ahead. 
  • The next instalment of the Meet the Investor series will be coming up next week. The newest investor managed to turn his uni scholarship into seed funding for his investment portfolio. 

Related articles: 

Macro
RBA's third bond-buying program arrives and will likely be more than $100bn in size...
Macro
What’s hot and what's not as stimulus tapers off?
Equities
$8.25 for Sydney Airport? Tell em they're dreaming

What did we miss?

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Also, if you're enjoying Off the Charts! or have any suggestions for the series let us know

-  Bella Kidman, Angus Kennedy, Nicholas Plessas, and Mia Kwok 


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