1 March 2020
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report|
|Sector : Information Technology||52-Week Range: A$3.66 – 23.00|
|Industry: Diversified Financial Services||Market Cap: A$3,964.7m|
We rate APT as a Buy for the following reasons:
- First mover advantage, having built up ~2.3 million clients and over 17,000 partnerships with retailers.
- Data monetization for APT and clients (potentially introduce data mining services).
- Vertical expansion – health, beauty, entertainment, travel.
- International expansion – U.S. is off to a good start and the Company will now launch into the UK.
- Potential corporate activity.
- Strong management team.
We see the following key risks to our investment thesis:
- High valuation which is susceptible to de-rating should growth rates miss expectations.
- Expansion into new verticals disappoints management and market expectations.
- Increased competition from major player(s).
- Execution risk with international expansion.
- Increased regulation.
- Significant data breach.
Afterpay Touch Group (APT) FY18 results were largely well understood by the market given the business updates leading into the results – so no real surprises in the numbers.
The big news from the results release was the move into the UK market via the acquisition of ClearPay which was accompanied by a capital raising. In our view, the expansion is in line with management’s stated strategy of moving into key global markets to establish a presence.
Again, given the market opportunity, should management execute on their plans, it adds significant earnings upside and diversification away from its Australian base. The launch is 6 months away and we will look to include the numbers in our valuation closer to 1H19 results. Additionally, the launch into the U.S. also appears to be tracking well.
We retain our Buy recommendation on APT, given its strong market positions with retailers (first mover advantage), opportunities to replicate its business model across different verticals (initial signs are encouraging) and move into the U.S. & UK, whilst not without risk, present significant opportunities.
For the U.S. alone, we estimate the segment could contribute more than US$1.0bn in revenue and US$350m in net transaction margin over the long-term. On the downside, increased regulator (ASIC) scrutiny does present some downside risk (ASIC has published an initial draft), however we remain comfortable with the business model and any potential changes.
- FY18 key points.
1. Group revenue up +390% to $142.3m on the back of higher underlying sales and stable merchant margins.
2. Group operating earnings (underlying EBITDA) of $33.8m was up +468% on pcp.
3. Net transaction losses were lower at 0.4% (from 0.6% on pcp).
4. Net transaction margin improved by 10bps to 2.6% of underlying sales. (6) As at 19 Jul-18, there were 2.3 million active users and approximately 17,700 merchants on-boarded.
- S. update. The Company noted the following:
1. There are over 800 retailers signed to date, with over 400 merchants currently using the Afterpay platform.
2. Over 150,000 registered users.
3. Underlying sales was approximately $12m in June and $20m in July.
- UK strategy announced. Whilst there is no doubt that execution is a key risk (also true for the U.S.), we believe the move into the UK market makes strategic sense. The market is considered to be world’s third largest e-commerce market. Afterpay will acquire a UK-based buy now, pay later business, ClearPay Finance Ltd. APT will launch into the UK within the next 6 months and will transition ClearPay to Afterpay brand and associated brands.
- ASIC draft legislation. ASIC has published a draft legislation which essentially provides powers to cover companies providing short term credit not already captured under existing legislation (i.e. the National Consumer Credit Protection Act). The key concerns raised by ASIC essentially is that some providers have designed products in this space to avoid scrutiny and that consumers are not fully aware of all the risks associated with these products. We have previously noted that this is a key risk for the Company and industry, however we do not expect any changes to legislation which APT cannot comply with. Further we note the loan amounts are small, APT does not hold any assets or claims to assets as collateral and customers accounts are linked to debit accounts for installment payments.
Figure 1: APT Financial Summary
Source: BTIG, Company, Bloomberg
Afterpay Touch Group (APT) is a technology driven payments company based out of Australia. APT comprises of the Afterpay and Touch products and businesses. The Company provides a “buy now, take now and pay later” business model. Merchants sign up to Afterpay which enables their retail customers to pay for purchases in four instalments without interest. APT pays merchants upfront, taking the credit and fraud risk upon themselves. Customers can pay by debit or credit card (Visa/Mastercard) – for this reason, APT considers banks and credit card providers to be “collaborators” instead of competitors. Merchants benefit because they are able to increase sales to customers who would normally not be able to afford to make purchases in a single lump sum.