Afterpay Has Expansion Well In Sight

Australia | Jul 08 2020

Afterpay's expansion is going from strength to strength and the company has undertaken several risk management strategies to shore up its balance sheet.

-Market dynamics are underpinning BNPL business
-Capital raising considered positive amid strong operating trends
-But is the stock overpriced?

 

By Eva Brocklehurst

Afterpay ((APT)) appears to be taking full advantage of both the short-term disruptions to retailing and the longer-term outlook for e-commerce. The company has undertaken several risk management strategies to shore up its balance sheet, given the economic impact of the pandemic and related restrictions on movement.

Morgan Stanley was impressed with the quarterly update, and the fact the company is raising capital to accelerate global growth, although acknowledges some of the good news is already priced in. June quarter sales growth was 127% compared with 97% in the March quarter and beat Morgan Stanley's estimates by 27%.

Market dynamics are underpinning the business, Macquarie asserts, as online channels are increasingly being used and the business seems well-positioned to meaningfully exceed the FY22 underlying sales target of $20bn.

Yet the broker downgrades to Neutral after the recent run up in the share price. Loss rates appear to have declined in each market because of strong repayment behaviour. Unusual features such as the pandemic and government support initiatives have affected the second half so the underlying trend is not completely clear, the broker acknowledges.

Macquarie expects subscriber growth and merchant numbers as well as the launch of in-store offerings in the US will be key catalysts going forward. So far, execution has been successful in the US and UK and this bodes well for the longer term.

Canada

Afterpay has confirmed plans to expand into Canada in the current quarter and additional markets late in 2020 or early 2021. Macquarie suspects a number of retail partners are already secured through existing arrangements in the US.

Wilsons incorporates assumptions around Canada into its modelling and notes plenty of growth opportunities, amid market share gains in the US and UK and the impending rolling out of Afterpay in US stores.

Germany is considered the next likely candidate with only Klarna a major competitive threat. Beyond Canada, Bell Potter also considers the EU the next stop for expansion, or maybe Southeast Asia.

Capital Raising

The company has undertaken a $800m capital raising to de-risk its operating model, consisting of a $650m institutional placement and a $150m share purchase plan. The sell-down by the co-founders, comprising 1.5% of shares outstanding, may have negative connotations but Morgans points out the parcel is only 10% of respective holdings and both retain sizeable positions.

The $250m sell-down is not a surprise to UBS, given the extreme valuation, while the capital raising de-risks the operating model. The broker assesses Afterpay could fund its entire FY22 sales assumptions via equity now. This assumes 70% of receivables would be funded via additional debt.

While the capital raising is positive and the operating trends are strong, UBS finds its fundamental valuation is unchanged and maintains a Sell rating. The company has declined to disclose the size of its loan book and the broker estimates receivables could have been $850m as of June 30. Based on sell-side consensus forecasts, UBS continues to assert the market is under-appreciating the capital intensity of the business.

Macquarie notes the company reduced credit limits for customers and introduced shorter repayment cycles in Australia during the earlier lockdown period. Some of these measures have since been withdrawn and in some cases expenditure limits are now actually above pre-pandemic levels.


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