Afterpay Limited

APT Details

Acquisition Update: Afterpay Limited (ASX: APT) provides technology-driven payment solutions to businesses and consumers through Afterpay and Pay Now services.

• On 2 August 2021, APT declared entering a Scheme Implementation Deed with Square, Inc. (NYSE: SQ) (Square). As per the Deed, Square would acquire 100% issued share capital in APT via a scheme of arrangement.
• The acquisition is expected to accelerate APT’s US growth, access a new category of in-person merchants, and deliver additional revenue to merchants.
• On 4 November 2021, APT confirmed the approval of SQ shareholders for the issuance of Square Class A common stock (new Square shares) to the APT shareholders. The Court of NSW (New South Wales) also approved the circulation of the scheme booklet and conduct of the scheme meeting.
• On 6 December 2021, APT plans to conduct an online scheme meeting to seek shareholders’ vote for the scheme. Post the scheme implementation, APT shareholders are entitled to obtain the 0.375 new Square securities (Class A share) for each APT share held at the Record Date (10 January 2022).
• APT shares will be suspended from trading by the end of trading on ASX on 6 January 2022.
• 18 January 2022 has been set as the planned implementation date for completing the acquisition of APT.

FY21 Result Highlights:

• The company reported ~90% YoY growth in its underlying sales to ~$21.1 billion in FY21.
• The EBITDA (excluding one-off items) declined by ~13% YoY to ~$38.7 million during the financial year due to increased investment in people, marketing, and operations to scale business in new regions and acquire customers.
• The active customers of APT grew by ~63% on FY20 to ~16.2 million during the year.
• The active merchant base rose from ~55.4K in FY20 to ~98.2K in FY21.

Underlying Sales & Active Customer Growth Highlights; (Analysis by Kalkine Group) 

Key Risks: The company faces technological investment risk, liquidity risk on loan originations, and regulatory restrictions given the evolving landscape for the fintech firms.

Outlook:

• The company focuses to consolidate its leadership position in the existing markets. It aims to further improve the customer experience and habituation through its new revenue streams.
• APT plans to invest in the omnichannel approach and benefit from retail intelligence insights from new initiatives such as Afterpay iQ (a new merchant insights platform).
  

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

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of APT gave a negative return of ~20.46% in the past three months and a positive return of ~15.87% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $81.850 - $160.050. The stock has been valued using the Enterprise Value to Sales based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ average EV/Sales multiple, considering the rise in debt-to-equity ratio, the continuing trend of negative ROE, and net margin. For this purpose of valuation, few peers like WiseTech Global Limited (ASX: WTC), Yojee Limited (ASX: YOJ), Dubber Corp Limited (ASX: DUB) have been considered. Considering the current trading levels, growth in active customers, merchants, underlying sales in FY21, growing digital investment in a new data analytics platform, indicative upside in valuation, and related key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $105.420, as of 23 November 2021, 1:26 PM (GMT+10), Sydney, Eastern Australia.

APT Daily Technical Chart, Data Source: REFINITIV  

EML Payments Limited

EML Details

AGM Presentation Highlights: EML Payments Limited (ASX: EML) is a provider of prepaid payment services via its online platform in North America, Europe, and Australia. The company held the AGM on 17 November 2021, wherein the Non-Executive Chairman, Peter Martin outlined the following aspects:

Growth in Q1FY22 (ended 30 September 2021) Key Metrics:

• EML witnessed ~29% YoY revenue growth to ~$52.4 million in Q1FY22.
• The underlying NPATA (net profit after tax, with adjustments) grew to ~$4.6 million, up by ~41% on pcp during the quarter.
• The overheads increased by ~24% YoY to ~$23.2 million due to employment of new resources in Europe, higher audit costs, higher IT expenditure.

CBI Update:

• The company is progressing on its remediation plan for PFS Card Services (Ireland) Limited (PCSIL), its Irish subsidiary. In a recent update, CBI has proposed limits on PCSIL’s material policy growth and remediation program which could adversely impact the entity’s business in Ireland. EML expects to resolve the pending issues with the Irish regulator, the Central Bank of Ireland (CBI).

Sentenial Limited Acquisition:

• EML acquired Sentenial on 1 October 2021, which now offers opportunities in open banking and account-to-account payments space for the business in Europe. The company has started the integration of the Sentenial platform and its TRACE platform to develop a unified digital platform to facilitate Prepaid and Open Banking in Europe.

Underlying EBITDA Highlights (Analysis by Kalkine Group)

Key Risks: The company faces the risk of technological upgrades on its platform, acquisition synergies, and regulatory delays in expanding operations (subject to CBI concerns and approval in Ireland).

Outlook:

• The company has revised the revenue guidance between ~$230 -~$250 million for FY22 (~$194.2 million in FY21) compared to previously given view of ~$220 - $255 million.
• The overheads estimate has been revised upward from ~$97 - $106 million to ~$103 - $112 million for FY22.
• The underlying EBITDA guidance remains between ~$58 - $65 million for FY22 higher than ~$53.5 million achieved in FY21.
• The company is on track to complete the remediation program by March 2022 to address the CBI issues.
  

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

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of EML gave a negative return of ~28.60% in the past three months and a negative return of ~18.07% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of ~$2.470 - $5.890. The stock has been valued using the P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight premium than its peers’ average P/E multiple, considering its higher FY22 revenue and underlying EBITDA guidance, expanded resource base with the acquisition of Sentenial Limited and its platform. For this purpose of valuation, few peers like Humm Group Limited (ASX: HUM), Credit Corp Group Limited (ASX: CCP), Money3 Corp Limited (ASX: MNY), and others have been considered. Considering the current trading levels, growth in GDV, revenue, and underlying NPATA, ~23 new contracts signed, launch of 64 new programs in Q1FY22, decent outlook, upside in valuation, and key risks associated with the business, we give a ‘Speculative Buy’ rating on the stock at the closing market price of $2.720, down by 5.556% as of 23 November 2021.

EML Daily Technical Chart, Data Source: REFINITIV  

humm group Limited

HUM Details

New Alliance with Air New Zealand: humm group Limited (ASX: HUM) offers consumer finance products such as humm, humm90 and hummpro, bundll to young consumers in New Zealand and Australia. On 18 November 2021, HUM declared a 10-year strategic alliance with Air New Zealand to launch financial services products. The products will be made available to the members of Air New Zealand’s award-winning customer loyalty program, Airpoints™. The partnership plans to launch the first product in FY22 and expects to generate significant upside for the partners.

CEO’s Address:

• The CEO highlighted HUM’s rapid business growth in the last three years with the BNPL business achieving over ~$1 billion in volume for the first time in FY21.
• The commercial business is progressing to grow to ~$1 billion in volume. HUM presently has ~2.7 million customers and over ~20,000 BNPL merchants.
• In 2HFY21, HUM launched in the UK and plans offer a bigger ticket instalment plans up to ~~£3,000 ahead. In Canada, it plans to go live immediately focusing on verticals - healthcare, automotive, and luxury retail, etc in 1HFY22.

Q1FY22 Highlights:

• In Q1FY22, HUM registered growth in volume across all business lines. The BNPL segment recorded a ~44.5% YoY increase in transaction volume and Australia and New Zealand Cards business volume was up by ~7.6% YoY in Q1FY22.
• The Commercial and Leasing segment posted an increase of ~102.2% YoY in volume to ~$205.1 million in the quarter.
• The net loss / average net receivables (ANR) stood at ~3.4% in Q1FY22, down by 10 basis points on pcp.

Volume Growth from Q1FY20-Q1FY22; (Analysis by Kalkine Group)

Key Risks: The company faces interest rate changes, risk of cost-effective funds for expansion strategies, and investment in technological upgrades on its platform.

Outlook:

• The company aims to achieve a sub ~40% cost to income ratio in the medium term compared to ~54.6% achieved in FY21.
• In the medium-term, HUM is targeting to increase its transaction volume and average net receivables more than twice of what it has achieved in FY21, owing to customer growth, frequency of transactions, etc.
• EML targets to grow the cash NPAT to over ~$100 million in the mid-term.
• HUM also plans to restore dividend payment in 1HFY22 and keep the targeted payout ratio to ~30%-40% of NPAT.
  

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

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of HUM gave a negative return of ~19.48% in the past three months and a negative return of ~21.10% in the past six months. The stock is currently trading close to its 52-weeks’ low level of $0.780. The stock has been valued using the Enterprise Value to Sales based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight premium than its peers’ average EV/Sales multiple, repayment of outstanding corporate debt, growth in transaction volumes across divisions in Q1FY22, and target to increase gross income and volume in the mid-term, etc. For this purpose of valuation, few peers like WISR Limited (ASX: WZR), Credit Corp Group Limited (ASX: CCP), Zip Co Limited (ASX: Z1P), and others have been considered. Considering the current trading levels, growth in transaction volume in Q1FY22, new partnership contract with Air New Zealand, plans to expand in Canada in 1HFY22, upside in valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the closing market price of $0.785, down by ~1.876%, as of 23 November 2021.

HUM Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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