Afterpay Touch - Refilling the tan after a good quarter

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
08 July 2020, 3:00 PM
Sectors Covered:
Insurance and Diversified Financials

  • Afterpay Touch (ASX:APT) has announced a A$800m capital raising to fortify its balance sheet and help accelerate growth.
  • APT produced another very strong quarter in 4Q20, delivering 46% sequential sales growth combined with relatively stable operating margins.
  • The Canada market launch is expected in 1Q FY21, while APT is also looking at potential entries into additional markets in late 2020 or early 2021.
  • We lift our APT FY20F/FY21F NPAT by ~7%-9% respectively. Our PT rises (Morgans clients can login to view detailed reports and price targets). APT's momentum continues to be highly impressive, but trading on 37x FY20 revenue, we see its valuation as fair and maintain our HOLD call.

Capital raising

APT has announced a A$800m capital raising, via a A$650m institutional placement, and A$150m SPP, at $61.75 (a 9% discount to the last close).

With APT having A$541m of cash on its balance sheet at 3Q20, we see this as more of an opportunistic raising following a strong share price run, but it obviously further de-risks the balance sheet (cash now $1.1bn) and provides capital to further accelerate growth.

While a concurrent founder sell-down ($250m) comes with the usual negative connotations (and only a ~5 month commitment to not sell further stock), the parcel sold is only 10% of their respective holdings with both founders maintaining sizeable stock positions (18.4m shares each).

Quarterly update

It's hard to find any real faults in APT's 4Q20 numbers, in our view.

We note particularly:

  1. 4Q20 sales comfortably beat consensus estimates by >~20%, and were up an impressive 124% on pcp and 46% sequentially (US and UK sales individually rose 60%-100% sequentially).
  2. Group customers (9.9m) and merchant numbers (55k) grew ~14%-18% sequentially, with APT adding 20.5k customers a day in 4Q20 (15.1k in 3Q20) and easily beating their FY20 customer target (9m).
  3. The expected FY20 group revenue margin, net transaction margin (~2%) and net loss ratio (55bps) are all broadly stable on recent periods.
  4. APT's FY20 EBITDA (ex-significant items) of A$20m-A$25m again beat consensus (Bloomberg A$1.1m) seemingly on higher sales and lower bad debts than expected.

Other points of interest

  1. The Canada market launch is expected in 1Q FY21, while APT is also looking at potential entries into additional markets in late 2020 or early 2021.
  2. Transaction frequency improved in all regions (ANZ 25x p.a. vs 23x p.a in 1H20).
  3. New key staff hires have been made to develop additional capability, e.g. adjacent value-add products and to better leverage APT data.
  4. Processing cost benefits have been realised from VISA and Mastercard strategic agreements.
  5. The AUSTRAC investigation remains on-going, with the RBA surcharge review delayed until 2021.

Changes to forecasts and investment view

We lift our APT FY20F/FY21F NPAT by 7%-9% respectively.

Our PT rises (Morgans clients can login to view detailed reports and price targets) on our earnings changes, a lift to long-term growth assumptions and a valuation roll-forward.

APT's momentum continues to be highly impressive, but trading on 37x FY20 revenue we see its valuation as fair and maintain our HOLD call.

More information

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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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