Stocks’ Details

Afterpay Limited

Opening of Share Purchase Plan: Afterpay Limited (ASX: APT) provides technology-driven payments solutions for consumers and businesses. The market capitalisation of the company stood at ~$19.41 billion as on 27^th July 2020. Recently, the company opened its share purchase plan (SPP), which was announced on 7^th July 2020. The company is expecting to raise around $150 million from SPP. The SPP follows the successful completion of $650 million placement to sophisticated and professional investors. The proceeds raised from the capital raising is likely to support the funding required for its rapid growth and provides the company with the capacity and flexibility to execute on potential merger and acquisition opportunities.

Sources and Uses of Funds (Source: Company Reports)

Robust Customer Growth: On 14^th July 2020, the company notified the market that its customers can now use Apple Pay to make purchases via Afterpay in physical retail stores and online. This service has been commenced by some stores in the US during July 2020. The company experienced strong performance in the business and delivered underlying sales amounting to $11.1 billion in FY20. APT reported a robust growth of 116% in active customers during FY20.

Expansion into Canada: In Q1 FY21, the company is expected to expand its footprint in Canada and launch in-store in the US. The company is exploring several small M&A opportunities to ramp-up the launch in potential new international markets. The company is scheduled to release its FY20 results on 24^th August 2020.

Key Risks: The company’s business is sensitive to competitive risk, which arises from the existing and new competitors entering the industry, in Australia and offshore. This competitive pressure may materially and adversely impact its ability to retain and grow its merchant base and its customers in all markets. In addition, the company is exposed to several macroeconomic risks, including retail trading conditions, employment rates, poor consumer confidence and weakness in local or global economies.

Valuation Methodology: P/BV Multiple Based Relative Valuation (Illustrative)

P/BV Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As of 31^st May 2020, the pro-forma cash balance of the company stood at      $1,194.9 million. We have valued the stock using Price to Book Value multiple based illustrative relative valuation method and arrived at a target price with the correction of high single-digit (in percentage terms). For the purpose, we have taken peers such as Zip Co Ltd (ASX: Z1P), Sezzle Inc (ASX: SZL), and Tyro Payments Ltd (ASX: TYR). The stock of APT has moved up by 158.46% and 88.68% in the past three and six months, respectively. As a result, the stock is inclined towards its 52-week high level of $76.620. Thus, considering the current trading level along with the movement in the stock during past few months, we give an “Expensive “recommendation on the stock at the current market price of $70.270 per share, up by 0.659% on 27^th July 2020.

Zip Co Limited

Acquisition of QuadPay: Zip Co Limited (ASX: Z1P) provides the point of sale credit and digital payment services. The market capitalisation of the company stood at ~$2.49 billion as on 27^th July 2020. Recently, Respiri Limited has executed a merchant services agreement with a wholly owned subsidiary of Zip Co Limited “Zip Money Payments Pty Ltd”. During Q4 FY20, the company reported revenue amounting to $46.4 million with a rise of 72% while FY20 revenue stood at $161.2 million, reflecting the growth of 91%. The strong performance was supported by the progress of the company on its ANZ strategy. The company announced the acquisition of QuadPay (US-based BNPL company) together with an investment of around $200 million from Susquehanna Investment Group (SIG) to accelerate its global expansion strategy and drive growth. After the completion of the transaction, Z1P would emerge as a global BNPL leader in 5 markets AU, NZ, US, UK, and SA with Pro-forma annualised TTV amounting to $3.2 billion.

Key Financials (Source: Company Reports)

Aspects: The company is well-positioned to navigate any potential outcomes from the current trading environment with the help of its investment in its credit-decision technology, proven track record in the management of its receivables portfolio, low arrears levels, credit checks from day one, flexible product construct, along with steps taken to mitigate the impact of COVID-19.

Key Risks: The company is mainly exposed to interest rate risk, credit risk and liquidity risk. Interest rate risk arises from its borrowings, and credit risk is influenced by the default on contractual obligations by any counterparty. The liquidity risk comes from the insufficient liquid asset, and due to this, the company is required to maintain sufficient liquid assets (mainly cash and cash equivalents) and available borrowing facilities.

Valuation Methodology: P/BV Multiple Based Relative Valuation (Illustrative)

P/BV Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Despite the COVID-19 pandemic, the company reported strong credit performance with net bad debts of 2.24% at the end of Q4, which is in line with expectations and significantly outperforming the market. We have valued the stock using Price to Book Value multiple based illustrative relative valuation method and arrived at a target price with the upside of low double-digit (in percentage terms). For the purpose, we have taken peers such as Afterpay Ltd (ASX: APT), Sezzle Inc (ASX: SZL) and Tyro Payments Ltd (ASX: TYR), etc. Thus, considering the recently announced acquisition of QuadPay, robust growth in revenue and strong credit performance despite COVID-19, we give a “Hold” rating on the stock at the current market price of $6.370 per share, down by 0.157% on 27^th July 2020.

Tyro Payments Limited

Growth in Transaction Processed: Tyro Payments Limited (ASX: TYR) provides credit, debit and EFTPOS card acquiring, Medicare and private health fund claiming and rebating services to Australian businesses. The market capitalisation of the company stood at ~$1.87 billion as on 27^th July 2020. In a recent weekly COVID-19 update, the company reported a rise of 7% in transaction value during the month of June 2020. During 1H FY20, the company reported an all-time $11.1 billion high in transactions processed, reflecting the growth of 30%. TYR posted payments revenue of $113.6 million with a rise of 29% due to transaction and merchant growth. The company realised a statutory net loss after tax amounting to $19.2 million and a pro forma net loss of $9.0 million in H1FY20.

Key Financials (Source: Company Reports)

Suspension of Guidance: Previously, the company has suspended its guidance due to uncertainty in relation to the spread and duration of the COVID-19 pandemic.

Key Risks: The company is mainly exposed to credit risk, which arises from the failure of counterparties in addressing their contractual obligations. In addition, the business is also sensitive to operational risk, which comes from inadequate or failed internal processes and systems, human error or misconduct, or from an external event.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: At the end of Feb 2020, the company was in decent financial position, with cash, cash equivalents and financial investments of $154 million against $149 million as of 31^st December 2019. We have valued the stock using EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit growth (in percentage terms). For the purpose, we have taken peers such as EML Payments Ltd (ASX: EML), Afterpay Ltd (ASX: APT), Sezzle Inc (ASX: SZL), etc. Therefore, considering the strong balance sheet, and growth in transaction processed, we give a “Hold” rating on the stock at the current market price of $3.700 per share, down by 1.07% on 27^th July 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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