APT (ASX) Broker Upgrades

Afterpay Touch Group (APT)

A Winning FormulaLeading the Pack

APT is onto a winning formula as the key innovator in the Buy Now and Pay Later space, dominating many of the high-value consumer areas with rapid growth across its key markets.

The US has passed 2m active users, the UK is off to a flying start surpassing 200,000 users within a quicker timeframe than the US when it started. ANZ closed the period at 2.8m active users, with the segment breakdown showing the division delivered EBITDA of $87.0m, up $43.4m vs pcp.APT confirmed a new partnership in the US, with VISA and Afterpay to jointly pursue the development of innovative new solutions to help with user experience, efficiencies and product.

The company will provide more detail when they are closer to launch, but rather than working against Afterpay, VISA has decided to collaborate instead, highlighting how important a player Afterpay is becoming in the payments space.The FY19 result delivered underlying EBITDA of $28.7m, vs our ~$25.0m estimate. Our EBTDA estimate was $14.1m, which includes the interest expense relating to the receivables book. Elsewhere in the result the key items appear to be moving in the right direction, with loss rates down, and the NTM improving.

However we caution that with a changing business mix and heavy investment occurring, it is hard to forecast short-term earnings, but we remain confident in the overall trajectory of the business. Earnings RevisionsFollowing APT’s trading update, we have upgraded our underlying active customer estimates by between 13.5% – 26.7% over the forward estimates, while we have upgraded our underlying EPS by 7.2%, 4.2% and 8.2% for FY20, FY21 and FY22 respectively. The earnings revision is driven by higher customer growth and Total Transaction Value (TTV) estimates, and offset to a degree by higher cost estimates.

We note that our CLV valuation methodology prioritises customer growth, particularly where gross margin and retention rates are healthy. Following these changes our revised Price Target is $38.41 per share (previously $31.76), with our Buy recommendation remaining unchanged. Disclosure: Bell Potter Securities acted as co-manager of the $117m August 2018 placement , and participated in the June 2019 $317m placement and $100m sell-down and received fees for that service.

Recommendation:Buy (unchanged)Previous Close:$28.28Price Target:$38.41 (previously $31.76)