APT - Afterpay Limited

[frugal.rock]

I feel a bit bad though, not posting I sold them.
I sort of sold nearly everything over 3 days.

Ok, that's fine, not sure what to do with these 200 Afterpay shares I bought at 32.99....
New 52 week low hit again today...
$ 17.89 strange days...

All good Knobby. Don't think there's any responsibility on your part, it's nice to know that you consider others.... (when the price is halved )

F.Rock

 

[Smurf1976]

I wonder how this company will go with regard to bad debts?

With the economic situation turning as drastically and suddenly as it has, there's going to be a lot of people struggling to meet their obligations and I'd think that those most affected, hospitality etc workers who are typically younger people, would be Afterpay's primary demographic?

 

[aus_trader]

I wonder how this company will go with regard to bad debts?

With the economic situation turning as drastically and suddenly as it has, there's going to be a lot of people struggling to meet their obligations and I'd think that those most affected, hospitality etc workers who are typically younger people, would be Afterpay's primary demographic?

Yes I think lay-by re-payments will come last in the scheme of things. Food, medicine, petrol, bills (to make sure power, gas and water doesn't get cut off) would take immediate attention I think.

 

[So_Cynical]

APT 15 bucks OMG.

Cash burn and retail exposure is poison in the VFC.

EDIT: 5 minutes later its 14.

 

[Dona Ferentes]

Sell now; buy later

down 33% today ... and a low of $11.92

lunchtime on Wednesday, with the company valued around $4bn, Afterpay co-founders Nick Molnar and Anthony Eisen posted a message to social media acknowledging the dire conditions facing its retail partners.

“Now more than ever we stand together with the businesses that are essential to the fabric of our Afterpay community. That’s why it’s important that Afterpay Day, our biannual shopping event, still goes ahead later this week,” the pair said.

“The last few days have been crazy for us all and we know there is still uncertainty ahead. We’re continuing to keep a close eye on development and work through ways we can offer support.”

 

[sptrawler]

Who wears the cost if people don't make the full payments?
Given they made a loss in the last report, posted by Barney on 27 Feb and that included an impairment of $47million, I would hate to see their next report.
I haven't followed them, only read Barney's post on 27/02, I don't hold.
Just my opinion.

 

[aus_trader]

Who wears the cost if people don't make the full payments?
Given they made a loss in the last report, posted by Barney on 27 Feb and that included an impairment of $47million, I would hate to see their next report.
I haven't followed them, only read Barney's post on 27/02, I don't hold.
Just my opinion.

Yes mate, @barney warned us even before all the share price decline happened, while APT was still a market darling. Well done Barnz with your company analysis, hope you saved APT holders a few cents

 

[bigdog]

ASX announcement today
19/03/2020 9:02:43 AM Letter to Shareholders (4 pages uploaded below)

780

 

[barney]

Yes mate, barney warned us even before all the share price decline happened, while APT was still a market darling.

I'll call the timing a bit lucky Aus but it does show the recent rises had a lot of optimism factored in

Been crook for a couple of days but I see it bottomed at under $10 on Thursday ..... Recovery yesterday was equally as volatile on big Volume.

Probably a few more swings over the short term given the state of the world.

 

[fergee]

I am very interested to have a look see at the retention and default numbers for this period. It will give a good indication of how robust their current model is. Also the bounce back in new customers afterwards may surprise on this as a lot of consumers will be looking to tap credit even more so than in a long time imo.

 

[PZ99]

Afterpay will probably get a speeding ticket by the end of today

 

[barney]

Mitsubishi Financial and Morgan Stanley buying up big the last few days …… A lot of punters were no doubt relieved of their Stock

Definitely not the time to buy now after 100% increase from the lows in 3 days (imo)

If it happens to fill that gap and re-test $11 however, the risk has been substantially reduced

 

[frugal.rock]

Afterpay will probably get a speeding ticket by the end of today

And today...
It's the high frequency traders that need the speeding ticket...
Unlikely that the ASX would pick APT out of the barrel of hundreds!
Would have to be a (un) lucky dip at the moment to get a "please explain"...

F.Rock

 

[shash]

BACKGROUND:

APT is a BNPL company founded to target the, credit card and debt shy, millennial’s. It has introduced a new payment vertical for consumers to achieve credit-card like consumption outcomes without the negatives associated with excessive debt. It’s a relatively new company expanding at a rapid pace across NAM & Australia.



THESIS:

The investment thesis for APT is long term industry growth for BNPL as a payment vertical as the number of millennial’s grow and their spending power grows. The business model is a cross between a lay-by system where customers used to pay in installments and then pick up their good once payments had been completed and credit cards/short term loans which allowed consumers to consume now and pay over time.

Total card usage has been rising in a digitized world, however, in this trend, the growth in debit card usage has far outstripped the growth in credit card usage in Australia. This demonstrates the millennial’s aversion to debt/credit-cards or interest based loans.

APT’s core competitive advantage for the consumer is an easy to use payment/budgeting tool that allows immediate consumption. The app is easy to use and doesn’t require the company to do background credit checks leading to a faster approval time (approximately 2-5 seconds for an existing user). There are no fees payable by the consumer to use the app and late fees are fixed at $7 per week and a maximum total of $68 in total late fees due.

APT generally offers their platform to a merchant who pay APT a % of the products sold through their offering. This ranges from 3-7% of the product value. APT pays the merchant who in turn sells the good/service to APTs customers. Currently, merchants are not allowed to pass on this cost to their customers according to their agreements. APT’s competitive advantage for the merchant is 3 fold:

1. Increase in the average order size per customer
2. Increase in the number of customers/leads to the store/website
3. Analytics for their products and easy on-boarding

APT’s target market started with females ages between 16-40 and their spending into the online fashion market, however, this has expanded to include all millennial’s discretionary spending. New verticals are still being identified such as healthcare treatments. Their current market they operate in are:

1. ANZ – Dominant player with first mover advantage. Online sales $29bn AUD
2. US – New entry with first mover advantage, still scaling. Very large online market $514bn USD
3. UK – Second entrant, still scaling. Online market £96bn
4. Canada – Will enter in 2020/2021. Online sales $25bn USD

Additional markets are available for APT to enter but this will depend on their merchants desire to enter new markets.

Financially speaking, APT runs a loan book with a tech angle to attract customers. This means the risks for APT are similar to that of a loan book:

• Loss rates & provisioning
• Availability of funding
• Balance sheet leverage

The core financial competitive advantage for APT is their ability to generate higher sales from a fixed loan facility. APT pays a fixed annual interest rate fee for their loan facility which is secured against their receivables and generates income through transactions by customers on which they make a fixed percentage of sales (3-7% paid by the merchants). Their receivables are very short dated (<30 days) but their costs are fixed on an annual basis, this means if they are able to increase the number of transactions on their fixed loan facility, they generate higher income per $ of loan capital they draw thereby increasing their ROIC. This is also supported by the fact that the number of transactions per customer per annum increase the longer a customer is with APT.

Valuation will be a challenge at present as the business is being run on a cash neutral basis. A view will be taken on the profitability of the business when the hyper expansion mode finishes. Key drivers will be NTM & EBITDA margins over the medium term as well as the view on what cash flows and loss rates look like through a cycle.



VARIANT PERCEPTION:

The market is currently caught up in the COVID panic and is focusing on the short term loss rates expected to arise from APTs loan book. The bull thesis is that the loan book is a self cleaning mechanism which eliminates weak customers and retains loyal customers who are more likely to stick to their payment obligations. The bear thesis is that the model hasn’t been tested through a cycle, especially one which has come to an end so abruptly.

TARGET PRICE:

$33.5

Assumptions:

• NTM – 2%
• EBITDA – 5%
• Able to capture 39% of addressable market in NAM, ANZ & UK
• 6% loss provisions (in terms of loan book)
• Av transaction size $175
• Book turn of 11.4

APT is undervalued due to:

Read rest of the blog post on: https://banksiafinance.wordpress.com/2020/04/12/afterpay-a-new-way-to-pay/

 

[MrChow]

APT looks to me like an all or nothing business.

Either it'll collapse on itself from bad debt margin > income margin and then struggle to raise more debt to forward to merchants for their customer receivables.

Or it'll continue to grow exponentially and manage to get the balance right and earn a percentage of an astronomical figure in the future.

If they can survive this coronavirus era you'd have to think their business model is pretty solid.

 

[martaart077]

Reading u post just made me think of a pyramid scheme.

 

[qldfrog]

ASIC warning about newbie day trading like mad, and articles specifically naming Afterpay as being widely used by these inexperienced traders.
a recipe for disaster for them but could be good source of win for more experienced punters
Worth taking the fact into account with this share

 

[Dona Ferentes]

so much for the thinking that APT is a flash in the pan. Its rebound from the GCC has been consistent, and APT reached a record high last week.

But this may not be for the old reasons. Now tencent is onboard with a 10% stake, acquired recently, the thesis for growth has morphed into a 'global payments systems' play, much more than the 'transaction clip' story.

 

[Dona Ferentes]

Fully digital, own the customer .... parallel banking systems? usurp Mastercard and Visa? Superpower rivalry?

The move onto Afterpay's register .... was in part a response by Tencent to Ant Financial, a key competitor, which recently bought a minority position in Klarna, a European buy now, pay later giant and one of Afterpay’s main competitors in the US. But both deals reflect the China fintech giants' desire to play a bigger role in the global payments system, where revenues are expected to hit $3 trillion by 2025, according to McKinsey.

As the US incumbents fret about the arrival of buy now, pay later into the world's biggest retailing market, Tencent this week revealed just how closely its approach aligns with that of Afterpay. This goes far beyond facilitating payments; rather, both companies are keen to use data to fuel deeper relationships with retailers.

[An analyst] detailed how online retail sales would be higher in the post-COVID-19 economy, which would force shops and brands in China to invest more in direct links with their customers. "We want to help a lot of brands and retailers establish an online presence which they own and control, to get directly connected to their users and to acquire new users online," he said. "That is the reason we are building up a lot of tools to facilitate that."

This is precisely how Afterpay thinks. While most outsiders consider it as simply an instalment payments product, inside Afterpay it's always been about building a platform to connect merchants and customers, and feeding back to retailers insights using the data generated to help them make more sales. At the same time, the data helps Afterpay learn more about credit risk.

Farewell to cash

Tencent and its big Chinese payments competitor Ant Financial, which is part of the Alibaba group, have a 90 per cent stranglehold on mobile payments in China and have largely eliminated cash from its economy in just five years. As Citi has described it, the companies are creating "parallel banking systems". By allowing customers to pay in stores by taking photos of QR codes with their smartphones through their WeChat Pay or Alipay apps, China has leapfrogged plastic card payments pioneered in the West five decades ago. And having saturated their local markets, both companies have been looking to expand abroad. This has primarily been to support Chinese consumers but also to create a beachhead in the global payments sector dominated by the United States. Their overtures have not always been welcomed.

Ant Financial, for example, faced a roadblock in 2018, when regulator the Committee on Foreign Investment in the United States (Cfius) blocked its proposed $US1.2 billion acquisition of US payments company MoneyGram on national security concerns. Two weeks ago, US Republican Senator Ted Cruz tabled legislation to ban federal employees from conducting official business over platforms run by Tencent, Huawei and other Chinese companies deemed too close to the state.

The scrutiny has resulted in both companies pursuing minority stakes in fintechs abroad; Alibaba has strategic interests in digital wallets in nine Asian countries, while Tencent has made fintech investments in not only Australia (where it also owns a part of Airwallex) but Argentina, Brazil, Hong Kong, Nigeria, France and Germany.

Despite the small size of the Afterpay investment – and even though buy now, pay later volumes in the US and Australia are minuscule compared to payments made on debit and credit cards – payments system watchers reckon the potential for a strategic partnership to develop between Afterpay and Tencent will be of concern to Visa, Mastercard and American Express.

"Having secured a major player, it 'marks their card' with every other major player, who now will have Afterpay firmly in their sights – so expect a greater level of competitive responses," Halverson says. "Will they directly launch competitive products, buy out one of the lesser competitors to use their platform or buy out a bigger player like Affirm? Will they work their bank relationships to make life harder for Klarna and Afterpay, or seek to disrupt processing and access to data? "Or will they work the political angles by asking the US to go after both Klarna and Afterpay for being 'Chinese'? They could do all these things – or they could do nothing."

With Afterpay and Tencent both talking up the strategic stake as the start of a deeper partnership, Afterpay investors realise the retail data it generates could become its most important asset, especially if it keeps growing in the US market.

Andrew Mitchell, a senior portfolio manager at Ophir Asset Management, which owns Afterpay shares, says the Tencent equity purchase is a "massive tick of approval" for the sector, but the key unanswered question is where Tencent sees the most value in Afterpay. "Is it its data on its Millennial consumers? The value it could bring global brands that use Tencent's payment platforms? Or is it to broaden its reach into other geographies, like the US and UK, that Afterpay is rapidly growing a foothold in? "It’s likely a combination of all three," he says.

Mike Ebstein, director of MWE Consulting, says that while buy now, pay later is tiny in terms of overall payment volumes, "there is no doubt the US credit card schemes are looking at it and they can't afford to sit back and ignore it". "There is no doubt that in any payments or reward system, the ability to collect macro and micro data on consumer behaviour is a huge benefit.

The fintechs know that the ability to digest and analyse spending and repayment data could help them expand into other areas of financial services, including banking. Tencent has already created a bank, called WeBank – which Lau says is taking a conservative approach to credit. Ant Financial earlier this year applied for a banking licence in Singapore.

"If Tencent or Ant Financial want to get into consumer lending, then the data held by buy now, pay later operators such as Afterpay would be extremely useful," says Lance Blockley, managing director at The Initiatives Group, another payments consultancy.

Additional services
Afterpay may also be influenced by Tencent's thinking on adding additional financial services to its payments offering. It made a new executive hire this week, bringing in Lee Hatton, formerly the CEO of National Australia Bank's digital bank known as UBank, in an unknown role. If it became a "stored-value facility", under regulations currently under review by the Reserve Bank, Afterpay could hold customer funds, allowing its instalment service to operate with less reliance on the existing payments system, which is currently accessed four times for each transaction, adding to costs.

Blockley is sceptical that in-person smartphone payments will catch up any time soon with the massive volumes seen by traditional debit and credit card networks in Australia and the United States. But he says it is inevitable that payments using mobile phones and wearables will rise.

Initially, this will be driven by digital representations of existing debit and credit cards in wallets provided by Apple or by Google in its Android phone; operators like Afterpay, whose services are mostly linked to existing debit cards; or directly inside applications, such as Uber. In-app payments, like those offered by WeChat Pay and Alipay, are the fastest growing sector of the market in Australia.

But it is possible, Blockley says, that new systems such as those pioneered in China could be used to send payments outside of the existing card systems. He points to the rise in direct person-to-person payments over Australia's "new payments platform" (NPP), real-time infrastructure that may in time directly compete with the card networks.

"Over time we may see a trend towards more mobile payments newly facilitated by the NPP ... at the point of sale, enabled by QR codes – but the economics and the speed at the checkout will be important for merchants," he says.

While Tencent and Alipay will continue to expand abroad to support their Chinese customers, it will be hard for them to gain traction with Western users – even if they wanted to – without extensive partnerships with local banks to help them link users to their bank accounts via the apps.

"To be exportable, they will need connectivity with bank systems," Blockley says.

Even if Afterpay doesn't become strategically important to Tencent, the deal could provide it with insight into China's cutting-edge thinking on payments technology, as the country prepares to move beyond the QR code towards biometric payments, including through facial recognition systems.

"Payments in 2030 will revolve around fully portable 'digital' consumer and business identity, which are supported in cyberspace and do not require a card, watch or phone," Halverson says. "Rather, a consumer 'calls up' the ID at any point of sale and confirms the sale using biometrics."

The United States is aware of the dangers its foreign policy is having on financial sector innovation. The Economist published a special report this week focusing on China's growing influence in global fintech and banking. One of the articles quoted an unnamed US general talking to senior bankers in January about an emerging threat from America's aggressive use of economic sanctions against China.

"America is misusing its clout as the predominant financial power, thereby pushing allies and foes alike towards building a separate financial architecture," the official said. The magazine opined: "The battle over payment methods masks a bigger war over the hardware and software that power them all. It is one that China is winning.

something for everyone.

(lot of ifs to get to the 2030 'nirvana')

 

[Dona Ferentes]

Came across this

No Australian company – and few globally – are acquiring new customers at the rate of Afterpay. It is approaching nine million active users

So it's how they retain them; the profile would have a range of profitable through to one-offs.