When it comes to reading the tea leaves behind the COVID-19 shutdown, investors are more interested in a ‘glass-is-half-full’ perspective as the economy starts to ratchet up again. Nowhere is the sentiment more evident than in the ‘catch-up’ rally experienced by the banking sector early last week, with the big four up between 4.9% and 8.6%.

But the Australian Prudential Regulation Authority (APRA) has brought some sobriety to the bank rally. In a speech to international bankers last Wednesday, APRA Chair Wayne Byres warned that it’s “dangerously naive” to assume bank shares will continue on an upward trajectory – given that an economic snap-back is unlikely, and that the real troubles for the financial sector remain ahead.

The banks account for 20% of the S&P/ASX 200 Index (ASX: XJO)’s market value, and have historically delivered both massive profits and generous dividends, which has made them surrogates for fixed income. They have consistently offered investors what the vast majority of listed stocks can’t: growth and income.

However, the great virus crisis (GVC) of 2020 has only added to a litany of issues that have been plaguing the big four for a while. These include the requirement to hold significantly more capital than ever before, plus a tsunami of additional regulatory risks.

Are bank dividends still a suitable surrogate for fixed income?

The net effect of the issues above is that the mouth-watering dividends investors could previously bank on now look decidedly less certain. The market is now rightfully questioning whether Australia’s multi-decade obsession with the big four banks is still warranted if their dividend levels are unsustainable.

For income investors who have treated bank dividends like annuities, this is a tough question to ask, especially with cash and bank deposits offering miserable returns.

Unlike the global financial crisis (GFC), the banking sector, and especially the big four, will not emerge from the GVC as unscathed. Federal government pressure on banks to extend questionable loans to help companies survive the GVC has forced the big four to hike their provisions (estimated at around $20 billion) for loans going sour.

Unsurprisingly, with an estimated $65 billion of retail property loans sitting on their books, the bulk of banks’ impairments will come from the commercial property sector, where landlords and the tenants in currently embroiled in massive arm wrestle over mandated rent relief. In the meantime, sectors where impairments are expected to be greatest include education, and tourism.

$210 billion in un-serviced loans

It’s estimated that around 274,000 ($56.5 billion) of the 703,000 loans ($210-plus billion) that have been deferred are business loans, personal loans and credit cards, with residential loans making up the rest. The reality check for businesses and mortgagees alike is that they will have to start repaying debt once the hibernation stage of the COVID-19 crisis ends.

However, adding to the banks’ problems is the strong likelihood that the ‘repayment holiday’ will go on a lot longer than anticipated. The longer the repayment of these loans are stalled, the more nervous banks will become about them being repaid, especially with the costs of deferring business loans continuing to mount.

But unlike the GFC when the official cash rate was set around 6%, today’s ultra-low borrowing costs makes it easier for banks take a ‘wait-and-see’ approach to potentially problematic loans. This explains why only a fraction of the estimated $210 billion in loans currently in deferral are expected to end up defaulting.

Adding another layer of comfort for banks, the much anticipated crash in residential property prices hasn’t materialised, with property prices having risen slightly in April.

The lure of banks without dividends

The single biggest issue for investors is whether the big four remain an alternative to dismal term deposit rates. At face value, this looks like a no-brainer. After all, with the RBA’s official rate of 0.25%, deposit rates will be 1.25%, which means that after inflation and tax, investors are out of pocket by around -1%.

However, with shareholders likely to receive either a much lower interim dividend or no dividend at all – due in part to the high bar that’s been set by the prudential regulator – the argument for holding bank shares becomes much less compelling. What’s also adding to banks’ troubles right now is the estimated 10% freeze on mortgages, plus a 15% hold on SME loan repayments.

Australia and NZ Banking GrpLtd (ASX: ANZ), and Westpac Banking Corp (ASX: WBC) have deferred their dividend completely. Macquarie Group Ltd (ASX: MQG) paid a dividend 50% lower at $1.80, while National Australia Bank Ltd. (ASX: NAB) paid an interim dividend of 30 cents, down 64% on FY19.

Then there’s the Commonwealth Bank of Australia (ASX: CBA), which hasn’t had to report yet but is also expected to take a scalpel to its dividend in August.

Before the recent rally, the market responded to expectations that ANZ and Westpac would mimic the Bank of Queensland Limited (ASX: BOQ)‘s decision to shelve dividends. Both banks share prices fell sharply.

While the recent rally offers cold comfort, the sobering question for shareholders and investors is how long will bank dividends be deferred for, and will a lower dividend policy become the new norm?

Have banks been oversold?

Intuitively, the short answer is a resounding no. Banks know better than anyone it’s going to be impossible to sustain investor support without the appeal of above-average dividend yields.

The banks entered the GVC with the most robust balance sheets ever, courtesy of APRA’s tighter regulatory and lending measures. So, it could be argued they’ve been oversold on the expectation that the fallout from COVID-19 will be a protracted affair. But assuming COVID-19 has only a short-lived effect on book quality, as many are predicting, the banks look well positioned for a near-term rebound.

Based on its bottom up analysis, Goldman Sachs suggests the banks can sustainably earn a highly respectable 10% return on equity in the current environment. The good news for investors is that this implies a 72% dividend payout ratio. However, factoring in dividends at 50% – in line with global forecasts – might be more in keeping with banks’ short-term profitability.

While the broker’s numbers suggest the sector should trade on 1.3x – around 24% above where it’s trading now – not all banks have the same appeal.

Look out for a deep dive into how to value the big four banks tomorrow morning, in which I’ll discuss the evaluation criteria specific to banks, and highlight some standout bank shares to consider.

More reading

• This ASX fintech share is up 489% since March
• Why Nearmap’s share price surged by 50% in May
• ASX 200 up 0.6%: NAB charges higher, ACCC investigates Qantas acquisition
• 3 things that could impact ASX 200 shares this June
• Afterpay share price rockets 50% in May, is it in the buy zone?

Motley Fool contributor Mark Story has no position in any of the shares mentioned. The Motley Fool Australia owns shares of and has recommended Macquarie Group 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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The Appen Ltd (ASX: APX) share price was among the best performers on the S&P/ASX 200 Index (ASX: XJO) last month.

The artificial intelligence company’s shares stormed over 19% during the month. This stretched their year to date gain to a very impressive 39%.

Why did the Appen share price rocket higher last month?

Investors have been fighting to get hold of Appen’s shares since the middle of April when it released a trading update.

That update revealed that demand for its services remains strong despite the global pandemic.

Appen is a leading developer of high-quality, human annotated datasets for machine learning and artificial intelligence (AI). Through its team of over a million crowd-sourced experts, the company prepares the data that goes into the AI and machine learning models of some of the biggest tech companies in the world.

In light of this strong demand, the company remains on track to achieve its guidance in FY 2020.

It expects to achieve underlying earnings before interest, tax, depreciation, and amortisation (EBITDA) in the range $125 million to $130 million. This represents a 23.8% to 28.7% increase on FY 2019’s underlying EBITDA of $101 million.

It also suggested that there is upside risk to its guidance due to a number of factors. These include a weaker Australian dollar, an increase in available crowd workers, and an increase in pandemic-led use of search, social media, and ecommerce platforms.

And while it has also warned that there are downside risks, I believe the real risk is to the upside. And judging by the Appen share price performance, the market does as well.

Is it too late to invest in Appen?

Although the Appen share price has been on fire this year, I don’t believe it is too late to buy its shares if you are investing with a long term view.

Due to the growing importance of AI and machine learning and its leadership position, I believe Appen can deliver strong growth over the next decade.

In light of this, I believe it is one of the buy and hold options on the market right now along with fellow tech share Altium Limited (ASX: ALU).

More reading

• 3 five-star ASX 200 shares to buy in June
• ASX 200 down 1.2%: Westpac tumbles, Appen reaffirms guidance, Costa CEO to retire
• Appen share price falls after positive update fails to impress
• 10 quality ASX shares to buy in June
• Forget day trading: Get rich with these top ASX shares

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Altium and Appen Ltd. 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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Sezzle Inc (ASX: SZL) could be one of the sleeper ASX growth shares to watch in 2020. It is a US based, buy-now-pay-later (BNPL) fintech that has seen its share price rise by 489% since 23 March. Sezzle has a number of benefits over its BNPL stablemate Afterpay Ltd (ASX: APT). 

About Sezzle

Sezzle’s location as a United States-based fintech immediately exposes it to the largest potential BNPL market in the world. With a US$5.4 trillion dollar retail market, the US makes Australia’s trading environment look like small beer. In addition, as a US-based operator, Sezzle doesn’t have to deal with the continual regulatory threats that Afterpay faces.

Afterpay is also up against stiff opposition from Klarna, a Commonwealth Bank of Australia (ASX: CBA) backed competitor. In the US and Canada there is no single entity with the size or relative scale the Commonwealth Bank has in Australia.  

Sezzle boasts 1.3 million users and 14.9 thousand merchants. It has also secured a credit facility worth US$100 million. In addition, the company is already looking northward to the US$460 billion Canadian retail market. 

Afterpay holds prime position on the ASX with a market cap of over $12 billion. Yet both of Sezzle’s markets are larger than the Australian market. 

BNPL fintech demographics

Like fellow BNPL fintechs Afterpay and Zip Co Ltd (ASX: Z1P), Sezzle also targets the Gen Z and Millennial consumer demographics. These groups are tech savvy and make up the largest slice of all age demographics in the US. Sezzle estimates Gen Z will hold 25% of total spending power in 2020. 

The company allows this demographic to control their spending, while giving them access to goods and services they would be unable to purchase with limited disposable income. 

Foolish takeaway

The fintech sector has seen some of the fastest growing ASX shares this year. I believe a number of our best performing shares over the next decade will also be in this sector. Sezzle has a number of natural advantages over its much larger rival, Afterpay, and therefore I think this company deserves a place on your watchlist.

More reading

• How bankable are the big four ASX bank shares in 2020?
• Why Nearmap’s share price surged by 50% in May
• Openpay share price surges 29% higher after BNPL provider reports record month
• Real wealth from 3 roaring mid caps in May
• Afterpay share price rockets 50% in May, is it in the buy zone?

Daryl Mather 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 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) has seen some strong share price gains over the past month. General market sentiment continues to rise. The Aussie tech sector, in particular, Nearmap Ltd (ASX: NEA) performed strongly with its share price surging 50% higher in May.

Other strong performers include Afterpay Ltd (ASX: APT) which has seen its share price up by 54% and Pushpay Holdings Ltd (ASX: PPH) which saw a massive 69% share price rise.

However, few ASX tech shares have managed to grow at such phenomenal rates.

So, what is behind the recent strong growth of Nearmap’s share price?

Nearmap’s strong subscriber growth continues

Nearmap has performed well during the last few months, as it continues to grow its subscriber base at a solid rate. In addition, its average revenue subscription continues to improve. This is further improving its overall margins. In particular, it has been growing strongly in the North American market.

A series of positive market updates in April and May, in particular, has encouraged investors.

In a May update, the company informed the market that its recent business performance has been very solid.

Month-to-month recent sales growth has been strong across its key market segments. This is despite challenging market conditions.

Actual cash value (ACV) for Nearmap’s overall portfolio was reported to be over $102 million. A strong result.

There has been some downward sales growth momentum. This is due to some customers delaying their purchasing decisions. However, the overall impact on its sales pipeline has been negligible.

Customer churn has pleasingly been declining. It was reported to now be below 10% on a 12-month rolling basis. This is down from 11.5% at the end of last year.

New artificial intelligence (AI) product set to launch this month

In another positive market update, Nearmap indicated that its new artificial intelligence (AI) product would be launched this month.

The AI product will target a range of industries including insurance, utility and local government. This follows the successful launch of its 3D and rooftop geometry products.

On track to reach break-even target

In a previous market announcement in April, Nearmap indicated a number of cash-management initiatives. These are aimed at reducing operating and capital costs by 30% and achieving a break-even target by the end of June.

In its latest update last week, Nearmap indicated that it is currently on track to achieve this goal. This also seems to have pleased the share market.

More reading

• How bankable are the big four ASX bank shares in 2020?
• This ASX fintech share is up 489% since March
• Openpay share price surges 29% higher after BNPL provider reports record month
• ASX 200 up 0.6%: NAB charges higher, ACCC investigates Qantas acquisition
• Real wealth from 3 roaring mid caps in May

Motley Fool contributor Phil Harpur owns shares of AFTERPAY T FPO and Nearmap Ltd. The Motley Fool Australia owns shares of and has recommended Nearmap Ltd. and PUSHPAY FPO NZX. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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 Openpay Group Ltd (ASX: OPY) share price jumped as much as 29.07% in morning trade today after the company announced a new funding facility and record results for the month of May.

Openpay is a small-cap buy now, pay later (BNPL) provider that made its debut on the ASX in December 2019. If offers payment plans up to $20,000 over 2 to 24 month periods.

Where rival Afterpay Ltd (ASX: APT) focuses on the retail sector, Openpay targets 3 verticals that historically lacked BNPL solutions – automotive, healthcare and home improvement. Leading merchants offering Openpay include Bupa, Bunnings Warehouse, Spotlight, Smiggle and Repco.

New funding facility

This morning, Openpay announced it has secured a £25 million debt funding facility with Global Growth Capital. From this, Openpay will immediately have £10 million available to support its fast-growing UK business. The UK business is currently operating online in the retail vertical and recently achieved a major milestone after launching with JD Sports in mid-May.

This new UK funding facility is on top of the company’s existing $75 million debt facilities, of which $45 million remains undrawn.

Commenting on the new funding facility, CEO Michael Eidel said:

“Openpay UK is emerging as a significant contributor to our Total Transaction Value. This funding facility with Global Growth Capital adds strength to our strong balance sheet and provides us with ample funding to support the delivery of our current growth objectives in the UK.”

Record month of May

Openpay also provided a trading update this morning following its Q3 FY20 results released in April. The company declared May 2020 as its strongest month in history, with key highlights including:

• Active plans totalling 739,000, up 220% from 231,000 in May 2019;
• 293,000 active customers, up 131% from from 127,000 in May 2019;
• 2,096 active merchants, up 50% from 1,396 in May 2019; and
• Total transaction value (TTV) of $170 million year to date, up 95% from $87 million in May FY19 year to date.

Growth in active plans, active customers and TTV were all record results. This performance was primarily driven by ‘OpenMay’, a month of special promotions with merchant partners across all industry verticals.

Importantly, the company noted its underlying loan book credit quality remains strong, while the number of weekly COVID-19 hardship requests continues to decline. Additionally, the incidence of fraud is also continuing its downward trend as a result of recent technology upgrades to Openpay’s platform.

At the time of writing, the Openpay share price is sitting 15.5% higher for the day at $1.49, taking its current year-to-date gains to 19.2%.

More reading

• This ASX fintech share is up 489% since March
• Why Nearmap’s share price surged by 50% in May
• Real wealth from 3 roaring mid caps in May
• Afterpay share price rockets 50% in May, is it in the buy zone?
• Why these 3 ASX 200 blue chips could be set for growth this week

Motley Fool contributor Cathryn Goh owns shares of AFTERPAY T FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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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Southern Cross Media Group Ltd (ASX: SXL) shares rocketed over 80% higher in May but is the Aussie media group in the buy zone with its current share price?

Why the Southern Cross Media share price surged in May

Southern Cross completed an equity raising and provided a trading update on 6 May. The Aussie media group launched a fully underwritten equity raising which included an institutional placement and a 1.75-for-1 pro-rata, non-renounceable entitlement offer. This raised $169 million at 9 cents per share for Southern Cross and helped to strengthen the balance sheet.

The trading update provided some good news with the group achieving positive earnings before interest, tax, depreciation and amortisation (EBITDA) in April. Significant operating cost reductions helped to offset the decline in revenues.

The Southern Cross Media share price was volatile in May and regularly featured in the week’s biggest movers. However, the Aussie media group moved the most last week when it rocketed over 70% higher. Last week’s share price gains were so strong that the media group was even sent an ASX Price Query. Southern Cross advised the securities exchange operator that it could not explain why its share price had risen so much.

Is the ASX media group in the buy zone?

Southern Cross Media shares are now trading at $0.23 per share. That gives the Aussie media group a $613 million market capitalisation but it was worth 4 times that much back in July 2019.

This says to me that COVID-19 hasn’t been the only factor weighing on the group’s share price. Regional television and radio has been doing it tough for a while but the pandemic certainly hasn’t helped with revenues.

I still think the Aussie media group’s shares are a speculative buy right now. There’s a lot of volatility in the share price and still more uncertainty in the months ahead.

Foolish takeaway

The Southern Cross Media Group share price could be cheap at $0.23, but I won’t be buying in just yet.

More reading

• ASX 200 Weekly Wrap: Surging bank shares push ASX toward 6,000
• These were the best performing ASX 200 shares in May
• These were the best performing ASX 200 shares last week
• 3 ASX 200 shares to buy for a Goldilocks-style bounce back
• ASX 200 up 0.1%: Big four banks rocket, Afterpay sinks lower

Motley Fool contributor Ken Hall 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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The S&P/ASX 200 Index (ASX: XJO) is on course to start the week on a very positive note. At the time of writing the benchmark index is up 0.75% to 5,798.7 points.

Four shares that have not been able to follow the market higher today are listed below. Here’s why they are dropping lower:

The A2 Milk Company Ltd (ASX: A2M) share price is down 2% to $17.34. This decline appears to have been caused by profit taking after some very strong gains in 2020. Even after today’s decline, a2 Milk Company’s shares are up almost 24% since the start of the year. Investors have been buying the company’s shares after it reported strong sales growth during the pandemic.

The Freedom Foods Group Ltd (ASX: FNP) share price is down almost 5% to $3.54. The diversified food company’s shares have come under pressure since the release of a trading update at the end of last week which revealed weaker than expected sales. In addition to this, the company warned that its margins had been negatively impacted by an unfavourable sales mix.

The Scentre Group (ASX: SCG) share price has fallen 3.5% to $2.17. A number of real estate shares have come under pressure today. This appears to have been caused by an announcement by Vicinity Centres (ASX: VCX). The shopping centre operator is raising $1.4 billion to help it navigate the pandemic. It also warned that preliminary asset revaluations indicate an aggregate reduction in asset value of up to $2.1 billion.

The TPG Telecom Ltd (ASX: TPM) share price is down over 3% to $8.22. This appears to be down to profit taking after a strong share price gain over the last month. Investors have been buying TPG Telecom’s shares amid optimism that its merger with Vodafone Australia will be a success. It also plans to rewards shareholders with a special dividend ahead of the merger.

More reading

• 5 ASX 200 winners and 3 losers from last week
• Will the A2 Milk share price hit $20 in 2020?
• How to be an ASX 200 share millionaire in 15 years
• How you can get very rich with ASX 200 shares
• 10 top ASX growth shares to buy in June for strong returns

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended Freedom Foods Group Limited and Scentre Group. 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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