The buy now, pay later (BNPL) sector is bigger than ever. According to Ibis World, the industry grew at 39.3% annually between 2015 and 2020. First emerging in 2011-12, Worldpay has also predicted the BNPL industry will double in the next three years. The sector has grown from 3% of all eCommerce payments in 2018 to 8% last year. 

In 2019, there was a surge of BNPL IPOs. Splitit Ltd (ASX: SPT) was the first listing of the year. Sezzle Inc (ASX: SZL) debuted mid year and Openpay Group Ltd (ASX: OPY) listed just before Christmas 2019. Industry giant Afterpay Ltd (ASX: APT) listed in 2016 while competitor Zip Co Ltd (ASX: Z1P) listed back in 2015 as Zip Money Limited. 

As the BNPL sector continues to experience rapid growth, we take a look at how ASX BNPL shares have performed since their IPOs. 

Afterpay 

Afterpay listed in 2016 at an offer price of $1 per share, giving the company a market capitalisation of $125 million. Shares are now trading at $69.81, meaning an investor at the IPO stage would be sitting on a 6881% return. Afterpay has grown into the largest of the BNPL providers by market capitalisation, and is now worth some $19.41 billion. 

Afterpay reported underlying sales of $11.1 billion in FY20, an increase of 112% on the prior corresponding period. Underlying sales in the fourth quarter were $3.8 billion, 127% above 4Q FY19. This was the highest quarterly performance ever, reflecting the accelerating shift to eCommerce spending since the impacts of COVID-19 emerged globally. 

Active customers reached 9.9 million in FY20, demonstrating the flight to online spending and attractiveness of the budget focused business model in the current economic environment. FY21 is expected to be a year of increased investment as the business looks to maintain strong momentum and capitalise on the opportunity to scale globally. 

Zip Co

The first of the BNPL providers to list, Zip Co joined the ASX in 2015 issuing shares at 20 cents each. Zip shares are now worth $6.38, giving a 3090% return to IPO investors. Zip raised $5 million in its IPO but now boasts a market capitalisation of $2.49 billion. 

Zip Co reported $2.3 billion in annualised transaction volumes in FY20, above its $2.2 billion target. Customer numbers increased to 2.1 million, a 63% increase year on year. Over the full year, Zip Co reported revenue of $161.2 million, an increase of 91% on FY19. 

The company’s business model has been tested during the pandemic and has proven incredibly resilient. Transaction volumes and customer numbers have continued to grow, and customer repayment performance remained strong. In a July trading update, Zip CEO Larry Diamond said, “…our penetration into defensive, everyday spend categories delivered in spades”. 

Splitit

Splitit listed on the ASX in January 2019 at 20 cents per share. The company raised $12 million in its IPO which gave it a market capitalisation of $54 million. It now has a market cap of $519 million and shares trading at $1.46, meaning IPO investors have seen a 630% gain. 

Splitit reported record growth in the June quarter with rapid growth across all KPIs. Merchant sales were US$65.4 million, a 260% increase on 2Q FY19. Average order value increased 44% to US$893 and total merchants increased 104% to 1,000 with large new merchants signing up. 

Gross revenue increased 460% to US$2.4 million in the June quarter with demand from higher value merchants ramping up. Customers looking to make better use of their existing credit and the accelerated shift towards eCommerce as a result of Covid-19 are driving growth. 

Sezzle

Sezzle listed on the ASX in July last year at $1.22 per share. At the time, the company had a market capitalisation of around $217 million. Now its market cap is nearly $780 million and shares are trading at $7.88, giving initial investors a 546% return. 

Sezzle is focused on the United States market and reported a record June quarter. Underlying merchant sales surged 58% quarter-on-quarter to $272.3 million. This represents an increase of 349% year-on-year. Active customers rose 243% over the year to reach 1.48 million. Merchant numbers were up 219% to over 16,000. 

In a July market release, Sezzle CEO Charlie Youakim said, “Our performance reaffirms our product’s utility to consumers looking for a smarter way to budget their personal finances and the overall market shift to eCommerce”.

Openpay 

Openpay joined the ASX in December last year, issuing shares at $1.60 each. The float valued the company at $150 million. Now Openpay has a market capitalisation of $425 million and shares are trading at $3.94. This gives IPO shareholders a hefty 146% return.

Openpay reported record growth in the final quarter of FY20 across leading indicators. Active plans increased 229% to 824,000 with notable improvements seen in the healthcare, retail, and automotive verticals. Active customers grew 141% to 319,000. In a July announcement, Openpay CEO Michael Eidel commented, “As more consumers sought better ways to structure purchases across their life needs, we saw a strong surge in new customers and plans”. 

Total transaction value grew to $192.8 million for the full year, up 92% compared to FY19. Revenue grew by 64% to $18 million over the full year, with business more than doubling in the United Kingdom. UK growth was driven by ‘OpenMay’ promotions and the launch of major retailer JD Sports on the platform. Despite lockdowns, active merchants still increased 52% on the prior corresponding period in 4Q FY20, reaching 2,162. Openpay is typically the sole BNPL provider, or one of only two, in the healthcare and automotive verticals. 

Foolish takeaway

The ASX’s BNPL shares have all performed well since their debut, which will please early investors. The shift to purchasing now but paying down the track seems to be gathering pace as the economy struggles. BNPL providers are also leveraged to the broader shift to eCommerce. With BNPL still only accounting for 8% of online purchases, it seems the sector still has room to grow, both domestically and internationally. 

More reading

• ASX 200 sinks 1%: IAG cancels final dividend, tech shares tumble, IGO jumps
• Why Afterpay, Evolution, IAG, & Vicinity Centres shares are dropping lower
• Should Afterpay shareholders be concerned about Shopify’s BNPL launch?
• Value stocks to rise on strong A$ and broker picks the cheapest ASX stocks to buy today
• How are 2019’s tech IPOs performing?

Kate O’Brien has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Sezzle Inc. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Sezzle Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The S&P/ASX 200 Index (ASX: XJO) dropped more than 1% today to 6,024 points.

Aside from the ongoing spread of COVID-19 around the world, the eye-for-an-eye ordering of consulate closures between the US and China is causing concern.

Here are some of the main headlines from today:

Insurance Australia Group Ltd (ASX: IAG) cancels its final dividend

IAG has announced today that it won’t pay a final dividend to shareholders. Its interim dividend of 10 cents per share paid earlier in the year already accounts for its policy of a dividend payout of 60% to 80% of annual cash earnings.

The insurance giant announced a few elements expected in its FY20 result.

The ASX 200 share expects to report that it achieved gross written premium (GWP) growth of around 1%. Management said this was consistent with its ‘low single digit’ guidance that it maintained throughout FY20.

It achieved an insurance margin of approximately 10%, with the shortfall against prior guidance of 12.5% to 14.5% largely driven by adverse natural perils, prior period reserving and credit spread factors.

IAG managing director Peter Harmer said: “We have experienced an immensely challenging second half to the 2020 financial year, characterised by severe natural peril activity, the disruption caused by the COVID-19 pandemic to our people, customers and suppliers, and the marked volatility in investment markets which has adversely impacted our results.

“We have seen some softening in our underlying margin in the second half. This stems from the combination of lower investment returns from diminishing interest rates, an increased reinsurance expense as we bolstered our protection following heavy perils incidence early in the calendar year, and some deterioration in Australian long tail loss ratios.”

The IAG share price fell around 7.5% today.

Big decline in property value for Vicinity Centres (ASX: VCX)

One of the ASX’s biggest property groups announced its portfolio valuation update today.

At 30 June 2020, Vicinity said its portfolio was worth 11.3% less compared to six months ago. In dollar terms, it amounted to a $1.79 billion fall in the valuation.

Independent valuers addressed market conditions by closely looking at underlying cashflows of the ASX 200 property business. They also considered the significant increasing of short to medium term allowance such as vacancy, downtime, leasing capital and lowering expectations for sales and market rental growth.

Whilst the overall portfolio fell by 11.3% in value, the flagship portfolio – consisting of Chadstone, premium CBD locations and DFO outlet centres – only saw a net valuation loss of 8.8%.

Vicinity Centre managing director and CEO Grant Kelley said: “Aside from Victoria which has had an increase in COVID-19 cases and recently reinstated stage 3 restrictions across metropolitan Melbourne, conditions across other Australian states continue to improve. For many of our centres, particularly those that are less reliant on office workers or tourists, customer visitation has returned to, or is close to, pre COVID-19 levels. Customer visitation across our portfolio is 68% of the prior year level, with 83% of stores trading. Excluding Victoria, portfolio customer visitation increase to 80%, with 95% of stores trading.”

Mr Kelley went on to say that further retail activity reduction could lead to lower valuations for its assets.

The Vicinity share price fell 2.5% today.

More COVID-19 provisions for Bank of Queensland Limited (ASX: BOQ)

BOQ saw its share price drop almost 4% after announcing its quarterly APRA update for the period ending 31 May 2020.

The ASX 200 regional bank said there was a $112 million increase in the loans that are 90+ days past due. That includes $58 million of customer loans where banking relief package applications have been processed subsequent to 31 May 2020. The rest relates to customers who didn’t elect to enter into a relief package or were ineligible.

The bank also said it has taken a further collective provision of $61 million during the third quarter of its FY20, bringing the total COVID-19 related collective provision to $71 million, the top end of its range.

More reading

• Escalating US-China tensions are sending these ASX stocks jumping higher today
• Fed up of dividend cancellations? Buy these safe ASX dividend shares
• Brokers name 3 ASX 200 shares to buy right now
• Will the iron ore price crash by the end of 2020?
• Vicinity Centres share price drops on portfolio devaluation news

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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News that China ordered the closure of the US consulate in Chengdu is adding to the gloom on markets, but it sent two ASX stocks jumping higher today.

The S&P/ASX 200 Index (Index:^AXJO) fell 1.3% ahead of the close with nearly every sector losing ground while the S&P 500 Index (INDEXSP: .INX) futures are pointing to a more than 1% drop for the US market.

China’s move is in retaliation for the US decision to shut the Chinese consulate in Houston, reported Bloomberg.

Worsening US-Sino ties to hit earnings

The US Chengdu consulate was opened in 1985 and covers Sichuan, Yunnan, Guizhou and Chongqing in the country’s southwest. It’s also a key listening post for developments in Tibet, where China is criticised by Western democracies of suppressing minority groups, added Bloomberg.

Sino-US relations have been steadily deteriorating with US President Donald Trump accusing China for spreading COVID-19 and taking a harder line against the Asian nation.

The breakdown is threatening global trade at a time when the world’s economy is careening into a deep recession due to the pandemic.

This will drag on the earnings of many ASX 200 stocks as they are exposed to US and international markets.

Strategic value shining through

But not all are worried. In fact, there are some ASX stocks that will benefit from the rising tension. One ASX stock that’s well placed to be rewarded is the Lynas Corporation Ltd (ASX: LYC) share price.

Shares in the rare earth miner jumped 1.9% to $2.17 on Friday when the market was tanking. Lynas is the only non-Chinese producer of rare earth commodities which are critical to the manufacture of a wide range of electronics and weaponry.

The US and its allies are desperate to cut its reliance on China for these critical raw materials, and that puts Lynas in a very good position, in my view.

Lynas is best hope for US supply

The Lynas share price had been under pressure recently on doubts that the US government will fund its proposed processing plant in Texas after intense lobbying by local miners.

But as I mentioned, Lynas is the only miner with any scale to replace Chinese supplies. The US government doesn’t really have a viable plan “B” – at least not one that can be put into action quickly.

All guns firing

Another winner from geo-political tensions between the world’s two largest economies is the Austal Limited (ASX: ASB) share price.

Shares in the shipbuilder also bucked the downtrend today by jumping 1.5% to $3.34.

Austal is building the Littoral combat ship for the US Navy but lost out on the tender to construct the multi-mission guided-missile frigates called FFG(X).

However, there’s speculation that Austal could get a second bite at FFG(X) as the US Navy can commission more of these warships in a shorter timeframe if it appointed a second builder.

The worsening relationship with increasingly militarised China could just provide that extra urgency for the US to tap Austal on the shoulder.

I own both ASX shares and I think they will outperform this financial year.

More reading

• ASX 200 drops more than 1%, IAG falls 7.5%
• Brokers name 3 ASX 200 shares to buy right now
• Will the iron ore price crash by the end of 2020?
• Value stocks to rise on strong A$ and broker picks the cheapest ASX stocks to buy today
• Up 38% in July! Is the Orocobre share price a buy?

Brendon Lau owns shares of Austal Limited and Lynas Limited. Connect with me on Twitter @brenlau.

The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Austal Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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If you’re looking to add some ASX blue chip shares to your portfolio, then I would suggest you consider the two listed below.

Here’s why I think they are among the highest quality options for blue chip investors to choose from right now:

CSL Limited (ASX: CSL)

I continue to believe that this biotherapeutics giant is the highest quality company on the Australian share market. This is due to the quality of its operations, talented management team, and its high level of investment in research and development activities. In respect to the latter, the company is pouring in almost US$1 billion into its research and development this year.

Historically, these investments have generated very high returns and helped cement its position as a leader in its field. I expect this to remain the case over the 2020s and for its in-demand therapies and vaccines to underpin strong earnings growth over the decade.

Ramsay Health Care Limited (ASX: RHC)

Another blue chip share to consider buying is Ramsay Health Care. Although near term trading conditions are likely to be challenging because of the pandemic, I believe it is worth looking beyond this and focusing on the long term. This is because Ramsay’s world class network of private hospitals appear perfectly positioned to benefit from the expected increase in demand for healthcare services in the future due to ageing populations and increased chronic disease burden.

In addition to this, Ramsay has a long history of making earnings accretive acquisitions. The most recent being the acquisition of Capio AB in Scandinavia in 2018. I believe there’s a strong chance it will follow this up with further acquisitions in the coming years that open it up to new markets and support its growth. Overall, I feel this could mean the Ramsay share price provides investors with strong total returns over the 2020s and beyond.

More reading

• How CSL could save Australia from COVID-19
• Value stocks to rise on strong A$ and broker picks the cheapest ASX stocks to buy today
• Why weakness in the CSL share price could be a buying opportunity
• 5 things to watch on the ASX 200 on Friday
• What to do if your ASX shares hit a record high

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia has recommended Ramsay Health Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Every so often, I like to take a look to see which shares have experienced meaningful insider buying.

This is because insider buying is often regarded as a bullish indicator, as few people know a company and its intrinsic value better than its own directors.

A number of shares have reported meaningful insider buying this week. Here are a couple which have caught my eye:

Citadel Group Ltd (ASX: CGL)

A change of director’s interest notice reveals that non-executive director Jayne Shaw has been buying this information management company’s shares. The notice shows that Ms Shaw picked up a total of 50,500 shares through two on market trades on 24 June and 25 June. The director paid a total of $167,193.18, which equates to an average of $3.31 per share. This purchase almost doubled Ms Shaw’s holding to a total of 100,000 shares.

With the Citadel share price down 40% from its 52-week high, it appears as though this director sees value in its shares at the current level. Interestingly, Citadel has been very quiet during the pandemic and hasn’t provided any trading updates. This could be an indication that it is on track to achieve its guidance. Citadel is expected to deliver revenue and EBITDA growth in FY 2020, supported by low double-digit organic revenue growth.

Collins Foods Ltd (ASX: CKF)

According to a change of director’s interest notice, one of this quick service restaurant operator’s directors has been buying shares on market. The notice reveals that Collins Foods chairman and independent non-executive director, Robert Kaye SC, has topped up his position. The chair picked up 3,125 shares for a total consideration of $29,861.90. This equates to an average of $9.55 per share and brought his holding to a total of 18,444 shares.

It appears as though this director is confident that Collins Foods will deliver another solid result in FY 2021. Last month the company released its full year results and revealed an 8.9% increase in revenue to $981.7 million and a 5.1% lift in underlying net profit after tax to $47.3 million. This was despite some of its stores being closed because of the pandemic.

More reading

• 3 of the best mid cap ASX shares you can buy right now
• Insiders have been buying TechnologyOne and this ASX 200 share
• 5 things to watch on the ASX 200 on Wednesday
• These were the 5 best performing ASX shares last week
• The latest ASX stocks to be upgraded by brokers to “buy”

Motley Fool contributor James Mickleboro owns shares of Collins Foods Limited. The Motley Fool Australia has recommended Citadel Group Ltd and Collins Foods Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Well, 2020 has been a disastrous year for ASX dividend shares, to say the least. Former income stalwarts like the ASX banks have slashed or even ‘deferred’ dividends entirely. And other dividend payers that investors used to regard as ‘safe’ – such as Transurban Group (ASX: TCL) and Sydney Airport Holdings Pty Ltd (ASX: SYD) – have turned out to be not so safe.

So where should investors turn? Consumer staples giants like Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL) dividends appear to be safe. But with current trailing yields of 2.67% and 2.37%, respectively, these shares will only go so far for a dividend investor.

ASX resources giants like BHP Group Ltd (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) have been spots of light this year on a dark dividend horizon. But ASX resources shares are notoriously cyclical, and many dividend investors don’t like to dedicate too much of their portfolios to this sector as a result.

So where to turn for dividends in 2020?

Well, I think this ASX dividend share is a great place to start.

Enter WAM Global Ltd (ASX: WGB)

WAM Global is a listed investment company (LIC), which means it acts like an investor in its own right and buys and sells shares on behalf of its owners. This LIC is run by the reputable Wilson Asset Management and focuses on internationally listed shares beyond the ASX. Some of its current holdings include names you might know, such as EA Games, Microsoft, Tencent and Hasbro.

Wilson Asset Management has said it has modelled WAM Global on its highly successful flagship LIC WAM Capital Ltd (ASX: WAM). WAM Capital is an ASX-focused LIC that has been around since 1999. Since then, it has delivered an average return of 15.6% per annum. Today, it offers a trailing yield of around 8%.

WAM Global only started life in 2018. But since then, this LIC has been growing its shareholder payouts at an impressive rate. Just this week, WAM Global announced a final FY20 dividend of 4 cents per share, which was a 100% increase from the prior final dividend. It brings the LIC’s total dividends for the year to 7 cents per share, up 250% from the prior year. On current pricing, this would give WAM Global a trailing, grossed-up yield of 4.93%, or 5.63% if we annualise the 2020 final dividend.

Given WAM Global has already proved it can be a top ASX dividend growth share, I think it’s a great investment for 2020 and beyond.

More reading

• Fed up of dividend cancellations? Buy these safe ASX dividend shares
• Will the iron ore price crash by the end of 2020?
• What the budget deficit means for ASX shares like Webjet
• Which ASX 200 shares are the safest?
• Are Marley Spoon shares future ASX blue-chips?

Motley Fool contributor Sebastian Bowen owns shares of WAMGLOBAL FPO. The Motley Fool Australia owns shares of COLESGROUP DEF SET, Transurban Group, and Woolworths Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Despite the economic uncertainty, CNBC reported this week that Warren Buffett has hiked his stake in a United States bank by US$800 million. Does this mean it’s time to purchase ASX bank shares?

What did Buffet buy?

According to a Securities and Exchange Commission filing, Berkshire Hathaway bought 33.9 million shares in Bank of America worth US$813.3 million. As a result, this lifted his stake to more than US$24 billion. The transaction was flagged as it resulted in an ownership interest amounting to over 10%.

This triggered a rally in Bank of America shares of 1% despite the fall in the US markets overnight. However, the Bank of America share price has slumped this year.

In a Berkshire Hathaway virtual AGM held in May, Warren Buffett was optimistic about the future and it appears he is confident in the future of his investment in Bank of America as well. 

Additionally, through Berkshire Hathaway, Warren Buffett has stakes in multiple other banks including Goldman Sachs and JPMorgan Chase & Co.

Should you buy ASX banks?

Similar to banks in the US, Aussie bank shares have been hit hard by recent events. National Australia Bank Ltd (ASX: NAB), Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group Ltd (ASX: ANZ) share prices are down 36.5%, 11.5%, 37.4% and 34.0% respectively in the past year.

On Wednesday this week, APRA chair, Wayne Byres, gave a speech stating that “our banks and insurers remain soundly capitalised and highly liquid. APRA’s stress testing of the banking sector indicates the industry is well-placed to withstand economic headwinds ahead: even when faced with severe adverse scenarios, our analysis indicates the banking industry would remain well above minimum capital requirements”.

Recent data from Roy Morgan also pointed to an increased satisfaction in Australian banks in May at 79.5%. This is up 1.1% compared to a year ago. However, this still trails mutual and foreign banks with satisfaction ratings of 89.2% and 85.5% respectively. 

An S&P report, as reported by Business Insider Australia, comments that Australian Banks are unlikely to see a return to their pre-COVID-era earnings.

S&P’s Sharad Jain said “For most banks, a steep rise in credit losses, and a sizeable drop in interest margins and fee income, will likely suppress earnings at least for the next year”. He also went on to say that “We forecast significant property price drops in Australia…”

Australian banks are particularly vulnerable to property price drops and have significantly increased provisions for losses.

My take

Australian economic conditions characterised by recession, low interest rates and high unemployment could point to a continued decline in ASX bank share prices. This is due to their being highly leveraged to the performance of the economy.

However, an investment in bank share prices presently could be rewarding over the long run as the economy recovers over a number of years. Additionally, Warren Buffett is known for investing in companies when other investors are fearful. Food for thought…

More reading

• Will the iron ore price crash by the end of 2020?
• ASX 200 sinks 1%: IAG cancels final dividend, tech shares tumble, IGO jumps
• Value stocks to rise on strong A$ and broker picks the cheapest ASX stocks to buy today
• Buy NAB and this ASX dividend share for income
• Which ASX 200 shares are the safest?

Motley Fool contributor Matthew Donald owns shares of National Australia Bank Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Tabcorp Holdings Limited (ASX: TAH) share price is bucking the downtrend after UBS urged investors to buy the underperformer.

Shares in the wagering and lottery business held flat at $3.62 in after lunch trade when the  S&P/ASX 200 Index (Index:^AXJO) tumbled 1.2%.

The Tabcorp share price also outperformed yesterday when it shot up around 5% after announcing the replacement of its chairman Paula Dwyer and upcoming departure of chief executive David Attenborough.

Tabcorp and friends lagging the ASX 200

However, this doesn’t change the fact that the stock is a woeful performer. Tabcorp shed more than 20% of its market value over the past year when the ASX 200 is down by 9%.

It’s been a tough time for most gambling related large cap stocks. The Crown Resorts Ltd (ASX: CWN) share price and Star Entertainment Group Ltd (ASX: SGR) share price lost around 30% each, while Jumbo Interactive Ltd (ASX: JIN) slumped 40%.

Punter survey provides ray of hope

But the tide could be turning for Tabcorp, so says UBS which reiterated its “buy” recommendation on the stock after it undertook a survey with 1,000 Australia punters.

“COVID-19 has had a positive impact for digital operators with almost 40% of respondents increasing their wagering spend,” reported the broker.

“While Sportsbet remains the clear market leader in brand awareness and customer experience, the use of Sportsbet as the primary betting app fell slightly to 28% (still #1 followed by Tabcorp at 19%, up 1% y/y).”

Better odds but poor payoff

Tabcorp’s aggressive promotions are helping it win market share with survey respondents citing this as the main reason for placing bets with Tabcorp for the first time.

But in some sense, this is a pyrrhic victory. Intense online competition is squeezing margins while the coronavirus restrictions is having a big negative impact on its gaming venues.

The silver lining is that retail cash betting only contributed 5%, or $40 million, to the group’s earnings before interest and tax (EBIT) in FY19. Surely the very modest income generating business can’t be seen as being a core asset to Tabcorp.

Divestment could trigger re-rating

UBS thinks now is the time for the group to consider divesting its retail division, particularly in light of management changes.

“This scenario would result in a variable contribution margin in line with the corporates; an initial decline in EBIT of over $100m but an outlook which is highly likely to see steady growth of 5-10% pa,” said UBS.

Earnings upgrade

The broker lifted its earnings per share forecast by 14% in FY21 and an additional 4% for each of the following two years.

This is to reflect a faster than expected recovery of retail closures and a stronger outlook for wagering.

“While the upcoming result will be negatively impacted by the closures of pubs and clubs and a difficult comp in lotteries, the next two to three years should see higher profit than what was experienced in FY19,” added UBS.

“Ultimately, we don’t believe that the pandemic will have a material impact on medium-term cash flow and underperformance represents an attractive entry point into the shares in our view.”

The broker’s 12-month price target on Tabcorp increased to $5 from $4.60 a share.

More reading

• Tabcorp share price up 5% as CEO and chair succession plan announced
• ASX 200 rises 0.3%, investors bet on Tabcorp
• Why Coca-Cola Amatil, Newcrest, QBE, & Tabcorp shares are pushing higher
• Why this leading fundie thinks ASX bank shares are undervalued
• Nanosonics and these ASX shares could be fantastic long term options

Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Jumbo Interactive Limited. The Motley Fool Australia owns shares of and has recommended Jumbo Interactive Limited. The Motley Fool Australia has recommended Crown Resorts Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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