Afterpay Touch Group Ltd. (APT.ASX) | Positive | Valuation: $15.45 Sentiment versus reality
The proposed Senate inquiry into the conduct of payday lenders, debt management companies and buy now/pay later firms is likely to expose some unscrupulous behaviour among the many operatives. Senate inquiries are notorious for mudslinging, and there will be numerous accounts of disgruntled customers. Sensational headlines are likely, negatively impacting on sentiment and creating bouts of share price volatility.
The reality is a different story. We do not believe Afterpay will become a poster child for the villains, in fact, it could be the opposite. The company is not a debt vulture, and it makes more money if customers make their payments and use the free service again and again.
Momentum remains very strong in Australia, and the US launch has gone better than expected. The network effect continues to drive retailers, service providers and consumers to the platform. There are now more than 20,000 retailers onboard, including 1,000 in the US, and more than 2.2m users. The UK goes live early CY2019, making the platform even more compelling for global retailers. Changes to forecasts
We have revised our EBITDA forecasts for FY19E-21E by -35%/-27%/-1%. The changes reflect inclusion of the UK (start-up losses $15m) and revised assumptions on the cost of the US ramp up ($21m loss in FY19E). Our blended valuation is up by 25% to $15.45 (range $10.30 for DCF to $25.22 for Peer EV/EBTDA), driven by the UK addition and the roll forward of capitalisation calculations to include FY21E. This is split Australia $7.29, UK $1.18 and the US $6.97. Our Thinking
Afterpay is rapidly becoming a verb in Australia, the US business is developing faster than expected, and the UK launch is imminent. The stock is trading on high near-term multiples, but we believe it is a unique business and well supported by the strong growth rates. We have upgraded our rating from Neutral to Positive, following the recent correction in the share price.
APT Price at posting:
$11.72 Sentiment: None Disclosure: Held
