APT (ASX) Afterpay Valuation

Some good news from RBC

October 13, 2020

Afterpay Limited
Upgrade cycle to continue: upgrade to Outperform

Our view: We upgrade APT to OP ahead of an anticipated trading update later this month which we expect will show continued acceleration in topline growth and accelerating customer adds in the US/UK. Furthermore, it appears consensus forecasts are not factoring in much of a seasonal
acceleration for the key Nov/Dec period. While APT looks expensive on near-term sales & earnings multiples, to date we have been too
conservative valuing the business. Over the medium term, we think the multiples are sustainable due to APT's competitive position, structural
tailwinds and further upside to consensus expectations.

Key points for upgrade:

1. Customer growth accelerating. Mobile app download data shows an increase of +8% QoQ in 1Q21 vs 4Q20 in the US and +16% in the UK.
This implies an accelerated rate of customer additions from the already impressive ~400,000 per month average in the US through 4Q20. Notably,
the month of September saw the most material month on month increase in app downloads in the US, up +13% vs August. Backing up these trends
is website traffic data, which increased +14% globally in 1Q21 vs 4Q20.

2. Seasonality skew looks low. We think current 1H21e consensus expectations are too low. Given our data sources indicate increased
momentum through September, we think APT is entering the seasonally strong 2Q period with a tailwind. Based on our estimates for average
monthly customer adds through 1Q21 (~535,000/month), consensus estimates available currently imply a slowdown in momentum through
2Q. For context, in the pcp monthly customer adds were ~60% higher across Nov-Dec 2019 compared to July-Oct 2019.

3. Underestimating compounding of customer frequency. We think the market is underestimating the compounding nature of increasing
purchase frequency, which in the early years of the US/UK is tracking ahead of the ANZ experience. If this frequency trend continues we see
further upgrades, while it will support continued strong sales growth as geographies mature from a customer growth perspective.

4. Valuation. APT looks expensive, particularly on near-term revenue and earnings multiples (FY21e EV/Sales ~28x, EV/EBITDA ~364x). However as we previously noted, there are few tech and high growth peers of APT's scale out there generating this level of growth. Taking a longer-term view,
we estimate the current share price implies a FY25e EV/EBITDA multiple of ~34x (fully diluted and discounted back to 12-months forward), which
compared to payments peers looks more reasonable.

Upgrade to Outperform. Upgrades to our forward earnings estimates are primarily driven by higher top-line forecasts and lower loss rate
assumptions. The net result of the changes sees our price target increase to $107.00/share and we upgrade to Outperform.