Profit taking, page-425

I enjoyed reading APT’s annual report and I continue to believe that it is very much overvalued.

I am in agreement with most of people that APT will continue to grow at a strong rate its customer base and volume transacted over the next few years, however I don’t agree that the money that it will make in future justifies the current valuation.

I hold a short position in this stock, warning to everyone who wants to short anything –following words of wisdom from John Maynard Keynes: “The market can remain irrational longer than you can remain solvent.”

I read a lot of commentary in recent days following the results and most of the people are excited about the customer acquisition growth rate. However, I think that people are being distracted with the wrong thing – what ultimately matters is if the company will ever make money and if so how much.

You need to be careful of representative heuristic – when there is a simple logical explanation that beautifully explains everything, people then quickly reach an easy conclusion without stopping and thinking through.

There is this belief that more people on the platform automatically translates into greater profit.

The value of any financial instrument is simply the net present value of it future cash flow or profit after tax discounted at an appropriate rate. For APT it is difficult to obtain a proper cashflow understanding because they consolidate the cashflow statement of group and there by including the warehouse funds. The timing difference between payment to merchants and collection from customers distorts the overall picture of operating cash flow, therefore I have used net profit after tax for my calculations.

APT is a very simple business and there are some key aspects that need to be estimated to be able to project the future profits.

	Items	Value	Notes
1	Transaction value	$20bn	Accept company projections of 2022
2	Revenue - Merchant	4% of transaction value	Based on financial statements and company disclosure
3	Revenue – late fees	0.75% of transaction value	Based on recent results (18% of revenue is late fees)
4	Cost – Variable cost	1.1% of transaction value	Based on result presentation slides
5	Cost – Bad Debts	1.4% of transaction value	Based on the % provided for debts not as yet due – ref page 86*
6	Cost – Salaries	0.75% of transaction value	Based on general staffing numbers to support customer base & current cost structure
7	Cost – Operating expenses	0.75% of transaction value	Conservative estimate it is usually higher than salaries.
8	Net Profit before Tax	0.75% of transaction value	Revenue – cost
9	Tax	0.22% of transaction value	30%
10	Net Profit After Tax	0.50% of transaction value	Rounded off to 0.50%

Note: In the calculation above, I haven’t included in stock option cost or depreciation & amortisation expenses which would continue to grow as APT will need to continue maintaining the platform, data centre. I have changed some estimates based on the most recent results.

* Page 120 of annual report – EY state that they have matched the post year end cash receipt to the provision value, so the 1.4% value is what the company lost on the amount that fell due post year end.

Therefore – At best the company will make a NPAT ofA$100m in 2022.

It is too difficult to predict what would happen subsequently. It will be a mature market at that time and there will be lots of competition, so hard to estimate growth rate from there on.

Future dilution of current share holders

APT is very prolific in issuing stocks, whilst it seems that this is free money, in reality it is diluting ownership of current share holders quiet significantly. Also it is very difficult to estimate actual number of options that company has issued based on disclosure.

	Shares on Issue 1 July 2017	212,409,000	100% Ownership
1	Additional Issued 2017	3,795,000
2	Shares on Issue 1 July 2018	216,204,000	98% Ownership
3	Additional Issued 2017	35,288,00
4	Shares on Issue 1 July 2017	251,492,000	84% Ownership
5	Matrix Convertible Note	21,777,661	Based on APT FS^
6	US ESOP	21,777,661	Based on APT FS^
7	UK ESOP & 10% Clearpay	200,000	Used an estimate
8	Other outstanding options	14,907,000	~Appendix 3B
9	Total Potential Dilution	310,154,322	68% Ownership from 1 July 17

^ Unsure if these option holders can just convert in equity in US company and not take up APT shares – In that instance APT shareholders will only be entitle to 80% of US profits. This is concerning as the company already counts 15% of Australian population as its customers and still unable to make money plus there is lots of competition coming in so most of the hopes are from the US & UK markets.

So the share holders who owned 100% of company as at 1 July 2017 – they have already seen their holdings diluted by ~32%. Now as the company grows its expenses will increase and it will also need to get greater access to warehouse facilities which means that future capital raising and dilution is a possibility. Company will also issue new ESOPs to staff resulting in further dilution of ownership.

There may not be a raising in current financial year, however there will be need for more capital raising prior to 2022 as when they reach the target of 20bn transactions they need to have spare capacity for future growth.

So in conclusion – I do a rough estimate of what should a business be valued at today - that will have a NPAT of $100m in 2022 and where your holding from what it is as at today already been diluted by 20% and most likely will be diluted further.

I don’t think that number is A$8bn.

I don’t know what will happen in future – Do your own research and critical thinking and come to your own conclusions. Do your own research and due diligence before making any investment decision.