Stock Update
Momentum
Australia

Afterpay Touch Ltd (APT:ASX)

4 Aug 2020
By
Afterpay Limited provides payment services. The company offers an installment payment service that is free for customers who pay on time. Afterpay serves customers in Australia, New Zealand, the United States, and the United Kingdom.

Latest Update: 04 August 2020

While we recommended members avoid the APT Share Purchase Plan (SPP) because the stock was trading at only a small premium to the issue price, I’m sure a number of members applied for new stock anyway as a brokerage-free way to increase exposure. The frustrating thing about these SPPs sometimes is that the larger the arbitrage, the more likely the scale-back when applying. This was confirmed this morning when APT announced that it would not be scaling back applications and that only 19% of eligible shareholders applied for the SPP.

The timing has been fortuitous for those who applied as the stock is up 5% today to $70.00, and with new stock being allocated on Thursday the hope is the stock holds up until then. Of course, those who applied on the hope of an arbitrage can simply sell some stock from their existing holdings if worried about the volatility of the stock.

Latest Update: 29 July 2020

We have yet to release advice on whether to apply for the SPP for APT as the stock has remained stubbornly near the $66.00 level at which shareholders would receive new shares. APT has been very volatile of late so we are reluctant to apply for the SPP unless there is a big buffer of safety. The stock closed yesterday at $68.57 which is only a 3.9% premium to the SPP price.

The closing date to get in application money is 5.00pm tomorrow so we need to make a decision today as BPay typically works overnight. The leads from the US overnight were weak so our guess is that APT won’t have a great day today. There is a one-week gap between the deadline and when we would get the new shares, so without a big buffer we are hoping for luck to go our way.

We are therefore going to recommend members let the APT SPP pass. For those of you holding less stock than you would ideally want, you may decide to apply simply to get stock without brokerage and at a small discount to the current price. But as far the official advice for those holding APT as part of the Momentum Strategy, we are going to sit this SPP out.

Latest Update: 15 July 2020

APT released its Share Purchase Plan (SPP) documentation today and rewarded retail shareholders unsure about whether to apply with the news that it has partnered with both Apple and Google to integrate Afterpay into the Apple Pay and Google Pay payment platforms.

This is huge news as this means Afterpay will effectively be available to be integrated into the operating systems of most mobile phones on the planet and should lead to far more retailers introducing the service as well as increased take-up from customers.

We hope to see the stock resume its rally after a sell-off yesterday and we need to apply for up to $20k worth of new shares at $66.00 through the SPP by the closing date of 30 July. We will likely provide a recommendation on the SPP on the Monday, the 27 July.

Update: 8 July 2020

APT emerged from its trading halt this morning after completing its institutional placement at the top end of the price range in a fantastic show of support for the company’s strategy.

Ultimately selling new shares at $66.00, the 2.9% discount to the previous closing price is a very skinny discount considering the rough $1bn being raised and stands out as one of the most well-supported raisings throughout this period of crisis.

Our view remains that this raising will support an accelerated expansion into new territories and, with only marginal profitability at the moment, isn’t overly dilutive at these elevated prices. Apparently 5% shareholder Tencent bid at $66.00 for well above its pro-rata amount but the company has not confirmed this morning whether any extra stock was allocated above that amount. APT has stated that it has rewarded institutions based on a number of factors including ‘likelihood of long-term support, the strategic alignment of the investor, support to date and the size and timeliness of bids into the book.’ We would certainly lump Tencent into that basket so hopefully its aspirations for more stock were rewarded, and the Tencent relationship remains key to a successful entry into the Chinese market.

As successful as the capital raising was, the increased demand now means that the share purchase plan (SPP) will be conducted at a price of $66.00 (or the volume weighted average price of the stock in the five days leading up to the closing date of the SPP). The SPP is currently only $150m so we are not anticipating being able to get much stock anyway, but ideally, we would like to see a big buffer before applying. We have some time up our sleeves here before any action is required so hopefully, we see the stock continue to rally. APT has opened this morning at a little over the issue price of the new shares and is trading at the time of writing at $66.90.

Original Update: 7 July 2020

APT went into a trading halt this morning as it announced that it was conducting an institutional placement and accompanying share purchase plan (SPP) which would raise roughly $800m at a price of $61.75 which is a 9.2% discount to yesterday’s closing price.

APT is following the lead of other e-commerce exposed companies that are flourishing in the new post-COVID environment in raising ample capital to support its supercharged growth aspirations. Considering APT’s balance sheet was the major impediment to APT expanding into too many territories in the near-term, this should alleviate that concern and allow APT to expand into Canada in the short-term and hopefully China after that.

Included in the capital raising is a sell-down of roughly 10% of the holdings of the two founders of the company in Anthony Eisen and Nick Molnar, and this may take a little steam off the stock despite the positives surrounding the capital raising. Similar sell-downs from founders such as Appen (APX) and Wisetech (WTC) recently led to short-term weakness before continuing the rallies they have both enjoyed, so we’re not overly negative on the effects of this sell-down.

APT also provided some good detail on the recent performance and there was a lot to like in the numbers. APT is exceeding every internal target and considering the capital-preservation mode the company went into in the early days of the pandemic, arguably this growth has been constrained – the $800m or so the company is raising should build APT’s capital buffers going forward.

One continuing piece of good news remains the surprisingly low bad debt numbers which suggests APT is doing a good job of identifying problem accounts early and limiting the credit available to them. APT’s net interest margin (NIM) remains around 2% which is the same as before COVID-19, so management is doing an excellent job in this regard. Probably the biggest negative was no real mention of the opportunity to expand into China but we expect APT is continuing dialogue with new shareholder Tencent about the best way to approach this.

APT has been very strong into this update so we expect to hold the stock beyond this upcoming Momentum Strategy rebalance and we will update members on what action to take on the SPP once booklets are sent to shareholders.

SHOW COMMENTS / QUESTIONS (2)

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David B.

The Australian newspaper had two negative articles on APT this morning, pointing out that the company has never made a profit and that the two founders sold $300 million worth of shares into the capital raising. At the time of writing the share price is sitting just above $66 on what is admittedly a down day for the market. The share price was as low as $12.44 in March…. just sayin…

Shannon Rivkin

Hi David, It’s rare to see tech stocks in market share expansion phase generate much in the way of profits. In APT’s case, we know that one dollar spent today in marketing and bringing on retailers/clients results in growing customer usage over time. For example, customers average around 8 purchases using Afterpay in the first year but this grows to over 25 times by the third year. So the dollar spent today doesn’t show the real return on invested capital early on, so I don’t think profitability is the key metric here. While APT is continuing to grow revenues so… Read more »

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