Afterpay: Another period of good growth

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
09 November 2018, 10:33 AM
Sectors Covered:
Insurance and Diversified Financials

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:

  1. US retailer numbers being 1,300 at the end of October (vs 455 at the end of August);
  2. US underlying sales (YTD) reaching A$115m currently (up from A$20m at the end of July); and
  3. 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:

  1. initial US net transaction margins being lowered by a skew to Enterprise customers (should reverse longer-term); and
  2. 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. 

Investment view

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.

More information

Morgans clients can login to view our detailed report and revised share price target for Afterpay Touch Group (APT). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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