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Afterpay Touch Steams Into The US

Australia | Jun 07 2019

Payment provider Afterpay Touch has steamed into the US, with stellar growth in sales similar to that experienced when the business started up in Australia.

-US margins may be negative and market needs to watch carefully
-UK roll-out more subdued versus US
-AUSTRAC investigation adds regulatory risk


By Eva Brocklehurst

Customer growth rates in the US appear to be going gangbusters for Afterpay Touch ((APT)), the "buy now pay later" payment provider. The company is on track to add one million US users in the second half of FY19 and will be closing in on 1.7m active US users by the end of June.

Afterpay Touch, which merged with Touchcorp in 2017, has been upgrading revenue forecasts for around two years now and, while growth is at a slower pace in more mature markets, relatively it remains stellar, brokers assert. The US business has performed very strongly, as sales, merchants and customers rose 115-135% half on half to the end of May, and sales totalled $531m in the first five months of 2019.

US net transaction margins improved, although Wilsons suspects this is in negative territory, supported by merchant fee income and stabilising losses as the business gains scale. While not explicitly clear, the broker assumes, on a reported basis, that US margins are negative and asserts the market needs to continue scrutinising US margins.

US trading was slightly below expectations, although Wilsons acknowledges progress is still "great" and moves forecasts up marginally to reflect momentum. The broker remains attracted to the long-term market opportunity across the US, UK and Australia yet notes the cost to execute globally is substantial and earnings margins will face headwinds in the near term.

Average expenditure in the US is similar at this point in time to what it was when operations started in Australasia and Bell Potter expects average expenditure to increase as more merchants are added and the US moves to in-store offerings to complement the online experience.

Bell Potter, retaining a Buy rating and $29.28 target, upgrades underlying active customer estimates by 2-2.9% and increases earnings estimates on the back of higher growth expected in total transaction value.

In the UK an initial 50 merchants provided a firm start in that market. Morgans notes the UK entry, launched as Clearpay, may appear subdued relative to the US but management has signalled a more phased roll-out in that country.

All up, initial progress in the US is encouraging and upside to the share price is likely if offshore roll-out plans can be successfully executed. Hence, Morgans has an Add rating and $25.96 target.

Australasia Maturing

Morgans considers the implied second half sales growth of 10% in Australia is “reasonably solid”. Growth rates in Australia are trending lower as the business matures, although sales growth of 100% is still expected in 2019.

Australian sales of $1.9bn in the second half imply the company will reach $2.2bn by the end of the half to June. Meanwhile, the investigation by AUSTRAC, Australia's financial intelligence agency, will at the very least, Morgans suspects, involve costs in order to improve processes to better comply with regulation. AUSTRAC has indicated it intends to review a range of international platforms for compliance, including Facebook.

Wilsons also notes AUSTRAC has raised some issues pertaining to anti-money laundering compliance and the company remains in dialogue with the regulator. Wilsons believes this has added a further dimension to the regulatory risk that has consistently affected the company and maintains a Hold rating and $21.85 target. This position reflects strong execution, with a valuation that discounts material market share in the online US market.

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