Openpay share price: top broker initiates coverage with a $2.25 PT

Shaw and Partners yesterday initiated coverage on Openpay (ASX: OPY) with a buy rating and a significant price target (PT) of $2.25 per share.

Competition in the buy now pay later (BNPL) space continues to intensify, as a number of key companies in the sector pursue an aggressive expansionist agenda.

Though not exhaustive, some of the key BNPL companies currently listed on the ASX include: Afterpay (ASX: APT), Sezzle (ASX: SZL), Zip (ASX: Z1P), Splitit (ASX: SPT) and most recently Openpay (ASX: OPY).

As we wrote leading into Openpay’s IPO; the company:

‘Has successfully raised $50 million in fresh funds, making 31.25 million shares available to retail and institutional investors in the process – at an offer price of $1.60 each.’

Unfortunately, Openpay (ASX: OPY) has struggled to find its footing since then: with its share price still trading below its IPO offer price prior to the market open today, at $1.24 per share.

Openpay share price bulls emerge

Yet some in the market appear optimistic on the company’s prospects, with the brokerage firm Shaw and Partners yesterday initiating coverage on the stock: slapping it with a BUY rating, a high risk disclaimer and a 12-month price target of $2.25.

At current price levels, if Shaw analysts are proven correct, investors would be looking at significant upside potential of around ~80%.

Good management, minimal debt ($24.3m in total liabilities; FY19) and strong positioning in a large addressable market are some of the key things that Shaw likes about Openpay.

Not only that, but the broker posits that the company has a differentiated place in the fast-crowding market – which thus far has primarily seen a focus being placed on retail purchases.

By comparison to others, Openpay has placed an emphasis on home improvement, automotive and healthcare purchases – and, most favourably – its customers have a lower risk profile than some of the sectors biggest players, argues Shaw, with OPY customers, representing an ‘older demographic’, with more than half of the company’s customers being older than 38.

Valuation doesn’t matter, until it does

On a valuation basis, Openpay also trades at a strong discount to its ASX-listed BNPL peers: currently trading on a FY20 EV/ Sales multiple of just 6x, ‘vs. combined 15x (consensus) for APT, SPT, SZL, Z1P.’

Mind you, though the broker sees a number of bullish signs, there are risks in play for the young, loss-making company. On this front, negative regulation changes, an unstable bad debt profile, technology shortcomings and funding issues represent key potential risks to the business.

It was also flagged that 'Shaw and Partners acted as a leader manager and underwriter to the recent IPO for which it received a fee.'

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