Afterpay Touch: Looking to pack their bags

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
20 April 2021, 11:00 AM
Sectors Covered:
Insurance, Diversified Financials

  • Afterpay Touch (ASX:APT) released its 3Q21 business update to the market.
  • Group sales of A$5.2bn were up ~100% on pcp (down 9% sequentially), while group customers and merchants were both up ~75% on pcp (+11%-15% on 2Q21 respectively).
  • Management noted that group margins remain firm and loss rates remain below historical levels.
  • APT will begin to explore the possibility of a US listing (with the North America division now the largest contributor to the group).
  • We lower our FY21F/FY22F EPS forecasts by 7%-8% on slightly lower sales growth assumptions. Our price target falls (login to view). APT is a quality business, in our view, but we retain our Hold recommendation on valuation grounds.

Update summary

Afterpay (APT) has released its 3Q21 update to the market. Group sales of A$5.2bn were up 100% on pcp (+123% on a constant currency basis), but down 9% on the seasonally stronger 2Q21 (A$5.7bn).

Group merchants (~86k) and customers (14.6m) were both up ~75% on pcp and 11%-15% sequentially on 2Q21. Overall business momentum remains relatively robust with revenue margins and loss rates remaining stable.

The good

  1. North America (NA) sales were up 167% on pcp (+211% on a constant currency basis) to A$2.6bn and flat on 2Q21. NA merchant growth was strong up 30% sequentially to >23k and broadly in line with the 2Q21 growth rate (+29%).
  2. NA in-store momentum appears to be accelerating with March sales annualised implying a run rate over ~A$225m (vs A$180m in 1H21).
  3. NA is now the largest contributor to group sales (based on 3Q21) highlighting the prodigious growth opportunity in that market.
  4. Revenue margins remained firm in 3Q21 and in line with 1H21, whilst gross loss rates remained below historical levels.
  5. APT recently launched a partnership with global payments platform Adyen, meaning merchants across all regions (NA, UK and ANZ) can now offer Afterpay to their customers.
  6. Customer transaction frequency continues to increase across all regions, with the top 10% of customers globally (by value) now transacting 33x a year.

Things to keep an eye on – including potential US listing

  1. Sales momentum slowed on the seasonally stronger 2Q21, with sales flat in the US and UK and down 19% in ANZ.
  2. APT has launched in Spain, France and Italy during 3Q21, with Clearpay on track to launch in Germany in 1H22.
  3. APT is exploring a US listing, given the NA division is the largest contributor to the group.
  4. APT Money is expected to launch in 1H22 with testing underway on deposit and savings accounts.

Changes to forecasts and investment view

We lower our FY21F/FY22F EPS forecasts by 7%-8% on slightly lower sales growth assumptions. Our DCF-based price target falls (login to view). APT is a quality business, in our view, but we retain our Hold recommendation on valuation grounds.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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