Afterpay Touch Group 

Mixed FY18 Performance: Afterpay Touch Group Limited (ASX: APT) failed to translate its revenue growth in profit during FY18. The company posted a loss in FY18 at $9.0 Mn in FY18 compared to $9.6 Mn in FY17.Statutory Profitability was marred by share-based payments for new senior executives and one-off costs linked to the Merger and International Expansions.
Net cash flow used in operating activities was recorded at $105.33 Mn compared to $78.87 Mn in FY17. At the end of FY18, the company is left with the lower cash and cash equivalents at $25.46 Mn compared to $29.60 in FY17. The non-current liabilities increased for the company to $113.5 Million primarily on the back of issuance of unsecured debt of $50 Million to support the expansion strategy of the company.
On the Valuation front, the company does not come out as a strong candidate for investment with negative operating and interest margin over past three years, reeling significantly lower than the industry average. Since the company has failed to post a profit, ROE has been negative at -10.4%. An increasing Debt/Equity ratio over the past three years indicates the rising interest burden on the company which can eat into the profits going forward. Afterpay’s merger and aggressive expansion strategy might take some time before reaching the breakeven or generating positive results for the company.

FY18 Financial Highlights (Source: Company Reports)
Meanwhile, the stock has generated YTD return of 168.37% and does not leave much room for significant growth from the current levels. Moreover, the positive developments such as increased adoption rate of the platform and so on seem to have been already discounted in the price. We, therefore, recommend “Sell” in the stock at the current market price of $15.940.
 

Xero 

Rising Subscription Base will support Topline growth:  Xero Limited (ASX: XRO) is a mid-cap company with market capitalization of circa $6.88 Bn as of September 18, 2018. Over the period, the company has seen subscriber growth from all the regions with Australia and New Zealand topping the chart, adding 884,000 in subscriber base. The United Kingdom has also witnessed 47% increase in subscriber to 312,000. Expansion in North America has been encouraging as the company added 40,000 subscribers, up 43%, bringing total subscriber of 132,000 in FY18. Additionally, the total lifetime value of Xero subscribers at 31 March 2018 was recorded at $3.2 Bn, representing about 45% rise in FY18 as compared to the last financial year. Over the 12 months to 31 March 2018, the group delivered operating revenue growth of 38% to $406.58 Mn against FY17. For the first time in the Xero history, EBITDA was positive for the full year and recorded at $26.0 Mn as compared to the loss of 28.61 Mn in FY17. It was due to the improved operating efficiencies across the business. However, net loss for the period came in at $27.84 Mn in FY18. On the margin front, Gross margin and EBITDA margin expanded by 400 bps and 1600 bps to 81% and 6.0%, respectively in FY18 against the previous year. It reflects strong growth across overall businesses along with lower finance cost and income tax during the year.   

Total Subscribers (Source: Company Reports)

Meanwhile, the share price has risen 41.45% in the past six months as at September 17, 2018 and there seems to be more potential for growth. Hence, we maintain our “Hold” recommendation on the stock at the current market price of $47.860.
 

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