Australia | Apr 15 2020
Broker views on Afterpay vary widely, despite the company assuring the market it is well-positioned to manage the current crisis.
-Real test of the business is yet to come
-Negative consequences for growth from risk mitigation
-Is the impact of the pandemic priced into the stock?
By Eva Brocklehurst
So far, there have been few disruptions to BNPL (Buy Now Pay Later) operator Afterpay ((APT)) from the coronavirus pandemic. Online business is ramping up as merchants rush to set up facilities amid the current lock-down of physical stores.
The company has noted in-store purchasing fell in the last two weeks of March while online was up 8% on the prior two weeks. The business has increased its cash position, reduced capital intensity and shifted to lower-risk and higher performance customers.
There are plans in place to increase the hurdle rate for approved purchases if necessary. Discretionary marketing expenditure is also being pulled. Higher bad debts are still expected, although partially offset by lower expenditure.
Macquarie assesses the business is managing the risks quite well at this early point in the downturn. Australia is shifting to six-week repayment cycles from eight weeks, in line with the US and UK. Morgans agrees the company appears ready to handle the bad debt scenarios in the near term and considers the recent sell-off in the stock overdone.
Bell Potter believes it is too early to be confident regarding the next few months and makes few changes to forecasts. The broker, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating and $45.95 target.
Wilsons agrees, suspecting the real test is yet to come, although assesses the impact of the pandemic appears priced into the stock and the strong performance to date needs to be commended. The broker, also not one of the seven, retains a Market Weight rating and $30.46 target.
Risk Management
UBS is much more negative, downgrading to Sell. The broker assesses the likely fall-out from the pandemic is still uncertain, although the balance sheet is strong and a capital raising is unlikely. Still, the business is fundamentally an unsecured consumer lending enterprise that is facing a severe recession.
Ultimately, the outcome will be a function of how much growth Afterpay is prepared to sacrifice to manage its bad debts along with the severity and duration of the pandemic.
Goldman Sachs acknowledges refinements to risk parameters will have some negative consequences for growth but believes the positioning is appropriate given the current uncertainty. If the business can manage the stresses in the June and September quarter, the broker expects this would prove the robust nature of the business model, and confidence should improve.
March quarter sales were up 97% and underlying sales in the month were up 12% on both January and February. Trading at the commencement of April is up 10% on the end of March. Meanwhile, EBay has become one of the main online stores across the business.
Active customers were ahead of most expectations. Afterpay has withdrawn guidance for a target of 9.5m active customers by the end of June, although asserts it remains on track.
Canada is readying for launch later in the year, while in-store roll-out in the US will depend on whether and when the pandemic restrictions are eased. Wilsons expects in-store business to be soft into FY21, although government stimulus and reduced consumer panic are supportive. The broker assumes a six-month impact from the pandemic and expects US store openings will be pushed into FY21.
Broad Exposure
The company currently has $541m in cash and $790m in liquidity along with $662m in existing headroom under its debt facilities. Hence, Morgan Stanley finds credit quality is solid and is reassured by the trends, although growth is more weighted to the US than previously expected.
The Australasian segment is proving resilient, Ord Minnett notes, owing to a broader sector exposure, as opposed to the US and UK which are more concentrated in fashion and cosmetics.
Goldman Sachs, not one of the seven, believes the company has clearly outlined its strong liquidity and flexible risk management and demonstrated a substantial margin of safety to facilitate the growth that is expected.
The broker assesses Afterpay is diverging from, and growing ahead of, its competitors, particularly in the Australasian and US markets. This bodes well for its market position once the pandemic has passed.
However, Goldman Sachs revises the target to $25.75, which implies a potential return of -9%, and downgrades to Neutral, noting, since adding Afterpay to the Buy list on March 28, the shares are up 49% compared with the ASX 200 which is up 13%.
FNArena's database has four Buy ratings, one Holds (Morgan Stanley) and one Sell (UBS). The consensus target is $27.04, signalling -1.6% downside to the last share price. Targets range from $13 (UBS) to $42 (Macquarie).
See also, Afterpay Forgoes Profit And Targets Expansion on March 4 2020.
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