Overview: Afterpay Touch Group Ltd (“Afterpay”, “the Company”) is an Australian technology company focused on payment technologies. The Company enables retail merchants to offer their customers the ability to buy goods and services on installment plans at no extra cost to the end-user. As of November 2018, Afterpay had 2.9 million customers and 21,000 retail merchants on-boarded. The combined entity listed on the ASX in June 2017 following the merger of Afterpay Holdings Ltd and Touchcorp Ltd.
Catalysts: Afterpay has experienced rapid growth in Australia and New Zealand across all key operational metrics – active customers, total transactions, and integrated retailers – and we see the potential for this trend to accelerate as the international expansion gathers pace. Afterpay launched into the US and UK in 2018 and early traction in the US has been promising with Afterpay successfully expanding its footprint in a market 25x larger than Australia. Successful adoption of its payment technology in foreign markets could be a long-term revenue growth driver.
Hurdles: Afterpay’s valuation assumes ongoing growth and there is no guarantee that the Company’s international expansion will be sustainable. Operating in the highly regulated payments market, Afterpay could be sensitive to legislative changes. There are risks of deteriorating consumer sentiment or customer’s ability to make repayments, which may put downward pressure on its operating margins. Afterpay operates in a highly competitive environment and may be subject to rising competition.
Investment View: Afterpay offers speculative exposure to online retail trends and emerging payment technologies. We are attracted to its revenue growth trajectory, penetration of the AUS/NZ market, and early signs of success in the US market. Risks include regulatory changes, changes in consumer sentiment, competition, and potential failure of its aggressive international expansion strategy. The US market has an inherently higher credit risk than Australia, however, to date management has demonstrated a strong track record of scaling-up the business via organic growth and acquisition. Following a 30% share price correction, we initiate coverage with a “buy” recommendation.
S3 Consortium Pty Ltd (CAR No.433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this report is general information only. Any advice is general advice only. Neither your personal objectives, financial situation nor needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice.
Conflict of Interest Notice
S3 Consortium Pty Ltd does and seeks to do business with companies featured in its reports. As a result, investors should be aware that the S3 Consortium may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making any investment decision. The publishers of this report also wish to disclose that they may hold this stock in their portfolios and that any decision to purchase this stock should be done so after the purchaser has made their own inquires as to the validity of any information in this report.
Publishers Notice
The information contained in this report is current at the finalised date. The information contained in this report is based on sources reasonably considered to be reliable by S3 Consortium Pty Ltd, and available in the public domain. No “insider information” is ever sourced, disclosed or used by S3 Consortium.
