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UBS Sell and $17 target!, page-249

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bontz777

212 Posts.

90

17/10/19

22:57

Post #: 40941860
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Originally posted by setfire2thehive: ↑

If one broker with an opinion of $17 can shed 15% in 2 days off a multi-billion stock - would suggest the market doesn't really know what APT is 'worth'. Especially given there's other brokers out there with equally drastic valuations.

IMO - most people buying APT are buying it because "it's so undervalued, price is going to go up" without logically referencing back to fundamental sales/revenue and margins required to, at some point, support the current or future market cap.

The vague comments of this is a growth stock check x,y,z they didn't make profit for x years and they're worth this much. (See amazon, facebook, uber (who shed a third of their market cap in 3 months).

For every 1 stock a person can find with a multi-billion MC and making a loss, i can show you 50 which are turning a profit. And there's a reason why the ASX200 is predominately filled with profit generating businesses - and that is "projected growth" has to eventually turn into realized profits.

This is not a dig at APT but i'd be interested in seeing some objective figures required to support the MC on future P/E basis.

For e.g.
To support a 9bn MC on a P/E ratio of 10 company would need to generate 900m in profit p.a.
Looking 2018-2019 revenue vs expenses. It's approximately 50% of revenue. So i'm excluding other expenses (which was money spent on business growth which actually skews the figures drastically in APT's favour). As previously these "other expenses" equated to the remaining 50% of the revenue hence the loss. This IMO would not be a linear relationship and so i have not extrapolated these costs.

But for the purposes on the demonstration we'll assume APT has reached full market saturation/penetration and therefore doesn't require these extra expenses and is simply operating the business model in a stable profitable state.

Given profit is required to be 900m and expenses are 50% operating income/revenue needs to be double or 1.8bn.

Given total revenue is a direct function of total sales. 80% of profit comes from 4% of sales and the remaining 20% comes from overdue fees.

Using similar assumptions 4% of 45bn in sales would generate 1.8bn in revenue to which ~ 20% is attributable to overdue fees.

Underlying sales appears linearly linked to the number of customers/merchants. That being, twice as many customers generated twice as much sales.

This makes sense to me; as all of the people i know using afterpay use it because they don't have spare capital. Meaning that the average annual spend per person remains constant - simply because they cannot support the additional repayments/expenses and additionally because of afterpay business model to restrict limits (good morals here - kudos to APT).

Using that logic - and assuming linear customers to sales APT will need approx 45m customers or 10 times the current market penetration.

This assumes no dilution or share issuance between now and said profitability.
all other assumptions in valuation are mentioned above.

Achievable - IMO Yes.
Likely - IMO No. - Hence the reason I opt not to invest from a fundamental perspective that the risk's do not outweigh the rewards. (for me)

This post is not meant as a down-ramp - and as i have previously indicated i have been extremely wrong with APT and may continue to be so.

The intentions of the post is for any readers that may be genuinely be wondering if APT is overvalued (if so why) and a potentially provide a view from an unbiased non-holder as to why that could be or why they would opt not to invest when the fundamentals appear so strong.

I do certainly agree that APT will generate revenue in the future and the business will continue to grow. The key is what that revenue will be and over what time period. This IMO is what the MC of all companies inevitably drive towards. There are outliers in the industry - if APT happens to be one then almost everyone's opinion or logic is void and all the holders will be rich.

*disclosure
- Never owned APT probably never will.
-Not shorting APT probably never will.
-Predominately resourced based investor based on fundamentals but utilize charts T/A for entries and exits.
-Dislikes the banks and current credit lenders on a holistic level so fully support the business model and general ethics APT has pioneered.
-non of my posts are hidden so people can view post history i'm pretty objective on stocks i do and don't hold.
-Why am i interested in APT - It's one of the few ASX outliers. Understanding how these type of stocks valuations fluctuates helps me to be a better investor across the board.

SF2TH

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Thanks a lot for your detailed analysis SF2TH, any genuine effort on analysis among too much noise is much appreciated.

My few cents:

Brokers has used the following for their calculations: (taking example of BellPotter):
Net margin: 2.1% . , let's take it 2.0% for simplicity and conservatively.
Average Annual Customer Spend: $1580 : let's take it as $1500 for the same above reason.

Their estimate of Annual Transaction Value is 30 Billion by FY2022:

Assuming that they're on a clear track to achieve this target (current growth projection), the number of users they need is
30 Billion divided by 1500 = 20 million users. (which they'll probably exceed as per current growth projection)

Net profit: 2% of 30 billion: 600 million

Not to forget, the company will rather be in a better growth phase due to further network effect and at breaking out if it achieves the above.

Calculating as per P/E that market would be ready to pay for this breaking out, proven results, scalable company:
P/E of 10: 6 Billion
20: 12 Billion
30: 18 Billion
40: 24 Billion
50: 30 Billion
60: 36 Billion

Looking at the current P/E of other growth companies that market has decided to pay, what would you take for APT?
WTC: 169
APX: 55 . (this is after a steep 30% fall from ATH)
ALU: 83
PME: 167
CSL: 59
JIN: 64

All of my above calculations and assumptions are based on APT's current growth trajectory without considerations of adding more verticals, new products, new markets, new products out of huge Visa deal etc etc.

Yes, there are few risks too absolutely. But the risk/rewards ratio is quite clear according to me.

Happy to have a feedback on my above assessment.

I have tried my best to keep it as simple as I could.

APT Price at posting: $31.98 Sentiment: Buy Disclosure: Held
9 Upvote

1 Great analysis

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