APT (ASX) Underestimating regulatory change risks

Originally posted by hankreardon: ↑

The reason why I think it will be higher is:
1. We know recurrent users have higher gross profit than new users (APT, SZL disclosed data; makes fundamental sense). The sales growth in H2 has been higher due predominantly by category expansion driving share of credit wallet in the existing user base in ANZ (there is lots of data out there to suggest this).
2. They specifically implemented first payment upfront in AU which should improve profitability substantially.

Loss rates will almost certainly be higher overseas. Evidence includes:
- higher proportion new users (see above)
- active users as % of total users are much lower in the US compared to ANZ at the equivalent stage of the lifecycle. Total US users were mentioned in one of the press releases - giving a 50-60% active user base. By comparison in Australia they changed how they counted customer numbers between a business update in May to June 2017 (or maybe 18). Backsolving the equivalent rate gave about 90-95%. We know that users keep coming back if they are allowed to do so, and it is Afterpay that holds back on customers being allowed to, so the conclusion can only be that it is due to higher loss rates or perceived risk of loss rates in this group. Of interest, it appears that Afterpays TIE has flagged Nevada as being completely off limits, presumably due to very high unemployment right now, which shows they are curtailing growth to protect margin, as they said they would do. This stands in stark contrast to competitors. Significantly- its major competitor in the US is barely making a gross profit (~10% from memory- you would have to double check) at all on its international operations, compared to the approximately 50% for Afterpay after BDD.

Finally, buried somewhere in the last update was Afterpays BDD is ‘at historically low levels’ in ANZ.

So all up...it looks like Afterpay AU is subsidizing the growth of its international operations. As it should be- the profits and very high income jobs (look at the revenue generated per employee) come disproportionately here.

Expand

Excellent analysis. I am very much in agreement with the points you raise. Where we differ is trying to convert this into an EBITDA number for each of the operating segments. Anyway, we will have our answer in a month or so.

M2R

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Underestimating regulatory change risks, page-48

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