Afterpay: Tencent stake doesn't change UBS viewWilliam McInnesUBS has held its sell rating and $13 price target on Afterpay, saying the 5 per cent stake bought by Tencent didn't change the valuation for the buy now, pay later provider.WeChat owner Tencent lifted its ownership in Afterpay to the 5 per cent "substantial shareholder" threshold. BloombergThe broker said Afterpay was currently trading at 11 times book value and while Tencent's investment could be viewed as validating the business model, it didn't change the fundamentals."At the current share price, we estimate that Afterpay would need to achieve more than $110 billion underlying sales at a ~2 per cent net transaction margin by FY25," said analyst Tom Beadle."This compares with our base case forecast of $39 billion underlying sales at a 2.2 per cent net transaction margin, and $4.8 billion in underlying sales at a 2.3 per cent net transaction margin in FY19."The broker also cast doubt on hopes Afterpay would be able to use the relationship to push its product into China through Tencent's platforms."A partnership leveraging Afterpay's merchant relationships for Chinese tourists or for cross-border transactions is possible, though in our view it is highly unlikely that Tencent will offer Afterpay leverage to its ~1.2 billion WeChat customers for domestic transactions in China," said Mr Beadle.UBS did acknowledge Afterpay's liquidity and funding risks appeared low in the current environment given the company's high level of equity funding and naturally high receivables turnover.
APT Price at posting:
$37.99 Sentiment: Sell Disclosure: Held
