Solid momentum continues
Afterpay Touch Group's (APT) recent market update highlighted, in our view, continuing strong business momentum across the board. The key positive being further evidence of initial traction in APT's US expansion, highlighted by:
- US retailer numbers being 1,300 at the end of October (vs 455 at the end of August);
- US underlying sales (YTD) reaching A$115m currently (up from A$20m at the end of July); and
- US customer numbers (300k) doubling from 150k in July.
In Australia, while APT's sales commentary was only broad ("a strong underlying sales performance YTD"), customer numbers (2.5m vs 2.2m in July) and merchant numbers (20,000 vs 16,500 in July) continue to grow strongly.
More clarity on international business financials
Additionally, APT management have provided more clarity on key financials related to the company's offshore expansion. The new disclosure primarily relates to a more precise figure being given for APT's expected FY19 UK EBITDA loss (50-70% of the US position = A$20m) and greater granularity on some relevant US business trends. These mainly included:
- initial US net transaction margins being lowered by a skew to Enterprise customers (should reverse longer-term); and
- US net transaction losses and other variable costs (mainly processing costs) being higher in relative terms than the Australian business in the initial stages.
While there are no large surprises in this new disclosure, we do incorporate some additional conservatism into our international business forecasts as a result.
Changes to forecasts
We downgrade our EPS forecasts by 17% in FY19F and by 8% in FY20F. This reflects a lift to UK expansion costs versus our previous estimates and more caution on US business margins/costs near term.
We think the recent pull back in APT's share price is unwarranted given impressive underlying growth trends. We see longer-term upside for APT from successful execution of the company's offshore growth strategy. We retain our Add recommendation.
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