Afterpay Touch Group Limited

APT’s Share Tumbled Over 6% Today (i.e., June 17, 2019): Technology driven payment company, Afterpay Touch Group Limited (ASX: APT) recently made an announcement to the Australian Stock Exchange, that it has provided notice under section 708A(5)(e) of the Corporations Act 2001. At the date of this notice, APT has complied with the provisions of Chapter 2M of the Corporations Act and section 674 of the Corporations Act. The company announced on June 12, 2019, that it had undertaken a fully underwritten $317.2 Mn institutional placement. The Institutional Placement was settled on June 14, 2019, following which APT has issued 13,793,104 new fully paid ordinary shares. The company issued the new shares in the market without disclosure under Part 6D.2 of the Corporations Act.The proceeds from the issue of the shares will be used to support the Company's mid-term strategy.

Recently, S&P Dow Jones added APT into the S&P/ASX 100 Index, effective from June 24, 2019.

H1FY19 (Ended on December 31, 2019) Performance Highlights: Underlying Sales increased by 147% to $2.3 Bn as compared to the previous corresponding period. Total income increased by 91% to $116.1 Mn (pro forma), as compared to the previous corresponding period. At the end of the period, over 3.1 Mn active customers were reported which was an increase of 118% as compared to the previous corresponding period. The company reported Gross losses (pro forma) of 1.1% of Afterpay underlying sales ($25.6 Mn), down from 1.6% in the previous corresponding period ($15.1Mn). Its late fee income as a percentage of total Afterpay statutory income was reported at 17.6%, declining materially from 22.5% in the previous corresponding period.

APT has maintained a strong balance sheet to support growth, including proceeds from a $142 Mn equity issue in September 2018, as well as enhancing the diversity and maturity of bank funding including warehouse funding facilities in Australia and new facilities under negotiation in the US.


H1FY19 Key Metrics (Source: Company Reports)

What To Expect: The company’s near-term focus is on accelerating the US and international growth, investing in key brand relationships, platform innovation and broadening global support and infrastructure. APT anticipates spending at least an additional $10 Mn (pre-foreign exchange and accounting changes) in mid-term growth acceleration investment activities in H2FY19. This expenditure will relate to new key merchant co-marketing activities and an increase in fixed operating costs (mainly people). This may change depending on the actual rate of new merchant on-boarding during the remainder of FY19.

The company’s accelerated growth strategy is expected to lay foundation for mid-term value creation. Following the intended near-term investment, APT expects significant operating leverage and EBITDA growth in the coming years, which will lead it in meeting its FY22 target of over $20 Bn underlying sales and net transaction margins of around 2% (post accounting changes).

Stock Recommendation: APT’s gross margin for H1FY19 stands at 77.0% which is better than the industry median of 73.6%. Its current ratio for H1FY19 stands at 7.80x which is better than the industry median of 2.81x, which implies the company is in a better liquidity position to address its short-term obligations. However, on valuation front, its P/B and EV/Sales multiple for TTM stand at 15.2x and 23.3x, which are higher than the industry median of 2.1x and 1.9x, respectively, indicating an overvalued position at the current juncture. It has recently made its 52 weeks high level of $28.70, and since then it has corrected by around 29.4%. Given the backdrop of mixed scenario, we have a wait and watch view on the stock at the current market price of $20.270 per share (down 6.114% on June 17, 2019).

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