Growth Paid Upfront
Fledgling alternative consumer lender, Afterpay Touch (ASX:APT) has seen a meteoric rise in its share price and recently continued to surge up on the back of a highly positive business update. This has attracted our attention, though, with the share price having rallied so much in a short span time (+131.8% ytd), the valuation has also reached stratospheric levels, with substantial expectation already priced in. Thus, we believe the most prudent move then is to wait for the hype train to die down and for the share price to rationalise. As such, we Traffic Light Afterpay Touch.
Afterpay Touch (ASX:APT)
is a relatively young payment services having grown substantially from being just an idea between two neighbours to the dominant layaway financier in Australia in less than 5 years of operation.
Image Credit: Company Website
The company leapt to prominence last week with a business update revealing tremendous growth in merchant transaction volumes (underlying sales) – up an impressive 289% year-on-year to A$2.18 billion. The company has also announced that it has onboarded circa 16,500 retailers and has end users numbering over 2.2 million, which is far ahead of any of its domestic peers.
The company’s recent launch in the US has also been well received, delivering A$11 million in merchant transactions in just 1 full month of operations, with circa 600 retailers signed up to the platform. Putting this in perspective, it took the company around 16 months to reach a cumulative A$11 million figure in Australia at launch.
That said, the company now forecasts EBITDA of between A$33 million and A$34 million (>10x yoy) on revenues of A$142 million (6.2x yoy).
The company’s share price surged over 40% in the couple of days following the report and has pushed valuations to stratospheric levels. With that said we take a brief look at the company’s background story and most recent financials.
Company Overview
Afterpay Touch (ASX:APT) is a Melbourne-based online point-of-sale alternative platform which allows retailers to offer to its customers the ability to buy a product on a “buy now, pay later”-basis and to pay in 4 equal instalments over a maximum period of 56 days without fees or interest. This service is increasingly offered alongside Paypal, Visa and Mastercard.
The company is fairly young, having only been founded in October 2014 by neighbours Nicholas Molnar, a millennial serial entrepreneur, and an ex-Investment banker (and ex-CIO of Guinness Peat Group) Anthony Eisen. Mr Molnar impressed Mr Eisen back in his university days when he was working late into the night packing jewellery for his online store, BeShop.
Co-Founders Anthony Eisen (Below left) and Nicholas Molnar (Below right):
Image Credit: Australian Financial Review
Mr Molnar subsequently negotiated a deal to gain exclusive rights to sell Ice.com’s (US’ largest online jeweller) products and turned his BeShop online jewellery store into “iceonline.com.au”, now Australia’s largest online jewellery retailer.
The spark then occurred when Mr Molnar realised that his sales improved substantially under an instalment payment structure and impressed the idea to Mr Eisen, which crystallised the concept of Afterpay.
The pair then approached Touchcorp (then listed in the ASX with the ticker TCH), a payments software business, in 2015 to develop the technology. As referenced in the graphic below, the company’s growth has been exponential and saw increasing technology demands given the rapid sales run rate.
Source: 22 November 2017 Investor Presentation
As such, the company opted to list in 2016 to raise capital and subsequently merged with Touchcorp in July 2017 to secure the businesses’ technology and extract synergies. This is reflected in the graphic below:
Source: 22 February 2018 1H18 Results Presentation
There have been clear efficiencies from the merger, with Afterpay maintaining its momentum by owning the technology underpinning it (developed by Touchcorp) under one company.
Previously, Afterpay (ASX:APT) originally relied on Touchcorp for its services via a Software Development and Licence Agreement, which was inflexible and operationally risky. Now the company has diversified its revenue stream, it can scale up relatively easily and most importantly, take full control of the development of its intellectual property. The current company structure is summarised in the graphic below:
Source: 24 August 2017 FY17 Results Presentation
The company’s business model is quite different from traditional layaway/layby system as it (i) allows customers to take the goods immediately, (ii) is available online, (iii) does not charge other fees except for late payment, and (iv) does not require separate application with different merchants given a unified platform.
Unsurprisingly, this has led to rapid adoption from end users which now number over 2.2 million in June based on the latest July filing, however, with growth as fast as it is, we believe this number will have been since surpassed.
The company has also made tremendous strides with the retailers, having acquired about 25% of the market of Australian on-line apparel sales and 8% of total Australian on-line retail sales. The company currently has circa 16,500 retailers under its belt. The graphic below shows a sampling of its partnerships across a broad spectrum of retailers, large and small, across various sectors:
Source: 22 November 2017 Investor Presentation
The company makes money via charging a direct cost to merchants at ~4% of the transaction value while takes on the customer default risk. Afterpay mitigates this via allowing smaller transactions sizes (~A$150) and a short repayment period of 56 days versus rivals like ZipMoney (up to 36 months), OpenPay (6-18 months), and PayPal Credit (6 months).
Afterpay (ASX:APT) also boasts a first mover advantage in Australia and New Zealand giving it the lead over rivals in securing a network-like effect between retailers and end users. Putting it in perspective, the company has over 16,500 retailers (as at June 2018) under its belt versus circa 10,585 retailers under its strongest rival, ZipPay.
The company also has more users by a factor of 3.5 to ZipPay (~628k). Mr Molnar achieved this dominance with a clever social media campaign by encouraging end users to contact their favourite retailers and request that they offer Afterpay.
All in all, we believe that the company is set for continued momentum going forward. The valuation however has in our view gotten way ahead of itself. The stock trades on an uber-premium FY19 multiple of 270 times, which drops to a mere 116 times for FY20.
Summary
Afterpay Touch is an alternative consumer lender that also doubles as an alternative to a point-of-sale system which uses a proprietary online payment platform. The company’s business model is similar to a traditional layby/layaway system but here the client receives the product up-front and pays later in four equal instalments. It earns its fees by taking in customer default risk and charges merchants 4% of the transaction.
Given that it’s a first mover in the Australian and New Zealand market, it has gained a network-like effect between retailers and end users and has achieved relative dominance in a short span of time. We also like that the company now has full control of its IP with the Touchcorp merger and has a high degree of operational leverage.
Despite all the plus factors, the fact that is Afterpay (ASX:APT) has become a social and traditional media darling which has pushed its share price to stratospheric levels. The stock trades on an uber-premium FY19 multiple of 270 times, which drops to a ‘mere’ 116 times for FY20. This is some way from the sector peer average of 18.2 times.
The company is still at an early stage of its life cycle making earnings estimates particularly difficult, however any disappointment on growth would lead to severe derating of its shares. As such we believe the best course of action is to sit on the side-lines, and await any substantial de-rating before making a move.
We are issuing a Traffic Light alert on Afterpay Touch (ASX:APT).
