APT - Afterpay Limited

[bigdog]

Market liked the news today

ASX ANN today
18/01/2019 9:44:29 AM Business Developments

467

 

[So_Cynical]

20 bucks here we come? if the general market rally continues - risk on, then i cant see why 20 dollars is not on the cards over the next month or so, after all it was a very good announcement today.

 

[bigdog]

20 bucks here we come? if the general market rally continues - risk on, then i cant see why 20 dollars is not on the cards over the next month or so, after all it was a very good announcement today.

So_Cynical $20 is in the ball park


https://www.moneymorning.com.au/201...hare-price-has-rocketed-11-93-today-asxu.html

18/01/2019
By Ryan Clarkson-Ledward

The Afterpay Touch Group Ltd [ASX: APT] share price has been the one to watch on the ASX this morning. Despite a note out of Goldman Sachs today, slashing its price target for the company by 26% to $19.25, APT has managed to rocket out of the gates this morning.

The payment provider’s share price has climbed 11.93% in the opening hour of trade, putting on $1.70 to trade at $15.95. Current trading price is $15.83.

According to Goldman Sachs, the reduced target priced reflects lower merchant fee assumptions in the US market.

Afterpay’s share price reflects strong performance
In an ASX announcement released shortly before open this morning, Afterpay provided investors with its key business developments.

According to the announcement, the company has continued its strong performance through the first half of FY19. Underlying sales globally for the period was over USD$2.2 billion, an increase of 240% from the corresponding period of FY18.

The company also reported strong growth within its user base, having transacted with over 23,000 merchants globally, consisting of 3.1 million active customers within the last 12 months.

According to APT, they experienced a growing average of approximately 7,500 new customer per day over Q2 FY19.

 

[bigdog]

cofounders Nick Molnar and Anthony Eisen will appear next Tuesday before a Senate inquiry into ‘‘ credit and financial services targeted at Australians at risk of financial hardship’’

My only criticism of Afterpay is that they allow users to charge their credit card who reimburse Afterpay and customers could find that they are unable to pay the credit card bills!


Todays AGE report

Afterpay sales boom as late fee income share falls
https://www.theage.com.au/business/...e-fee-income-share-falls-20190118-p50s6h.html

Booming payments business Afterpay Touch has seen sales on its platform more than double in the latest half to $2.2 billion, as it stepped up its expansion both domestically and into the massive United States market.

Shares in the buy now, pay later platform surged by 14 per cent on Friday, after an upbeat trading update that revealed a record month in December, while saying moves to limit late fees were also starting to have an impact.

Afterpay co-founder Nicholas Molnar, who will appear before a Senate inquiry with co-founder Anthony Eisen next week.Credit:James Brickwood

After it last year launched in the US, Afterpay said its underlying sales in the latest half were up 140 per cent, to $2.2 billion, and it was signing up roughly 7500 new customers a day in the most recent quarter.

The US business had processed $260 million in underlying sales in the first half, and based on this performance the US business was on track to process more than $500 million in underlying sales a year.

In a sign of the large market potential in America, Afterpay said it took a much longer 28 months to generate $260 million in underlying sales when it first launched in Australia.

Buy now, pay later schemes allow customers to receive their goods before they have paid for them, but they are not regulated under credit laws.

Amid scrutiny of its business model by consumer groups and regulators, Afterpay - which does not charge interest, but does impose late payment fees - said it would cap late fees at 25 per cent of the purchase price or $68, whichever is higher.

On Friday, the business said late fees as a percentage of its total income had fallen to less than 20 per cent in the latest half, compared with 25 per cent in the last financial year.

The trends comes before co-founders Nick Molnar and Anthony Eisen will next Tuesday appear before a Senate inquiry into "credit and financial services targeted at Australians at risk of financial hardship".

The business model has proven highly popular with younger consumers who are increasingly shunning credit cards, but it has come under scrutiny amid concerns some customers are being extended credit without sufficiently rigorous checks.

Afterpay was created to provide customers with a better alternative to traditional credit products.

Afterpay also said it expected that net transaction losses from consumers not making their payments would be at the lower end of its target range of 0.6 to 1 per cent.

"Afterpay was created to provide customers with a better alternative to traditional credit products," the company said.

"It is a free service if customers pay on time and our business and operating model is designed to
champion the customer and promote responsible customer spending."

Afterpay shares jumped 14 per cent to $16.14 on Friday and have risen by 115 per cent in the last year, giving it a market capitalisation of about $3.7 billion.

‘It is a free service if customers pay on time.’

 

[luutzu]

Please feel free to correct me [as if I need to ask]....

But from my understanding, APT's a losing business model.

It's taking on too much risk for very little, very marginal, returns.

If interest rates, or APT's funding costs rise, shareholders better hope they can pass it on to the retailers through rising fees.

The move to the US can be problematic. Don't they have personal bankruptcy there where people can just go broke and it won't follow them [beside a bad credit record?].

So the increase "sales" reported is just increased liability.

 

[Knobby22]

Don't forget they are opening in Britain so it will definitely increase hence their new finance arrangements.

They charge the retailer between 6 and 8 % of the sale.
They get it back the cash in installments over 6 weeks. Pretty good return in my view. Better than the retailer who has to buy the stock, display it and pay all costs.
2.2 billion in sales during recent 6 months, steadily increasing. You do the maths.

They are making a profit but obviously this much growth needs cash flow.
A bad credit record in the US is a big thing and since they won't lend you much at first (from memory $150), why would you get one for that?

 

[galumay]

One thing I wonder is how many retailers have raised their prices for all customers to offset the cost of providing the Afterpay service? Obviously APT claim that the extra cost to business is offset by increased sales, I very much doubt that and expect where they can retailers will be increasing prices to cover the cost, just as they did with credit cards (with much lower fees).

I deliberately avoid retailers who promote using Afterpay just on suspicion that I am likely paying extra.

The hype the company puts out always makes me a little uncomfortable with the business, eg "Its a free service if the customer pays on time." - its not free, in all liklihood we all pay, even those who dont use it. Its just that the service charge is indirect because in the first instance the retailer pays for the service.

None of the above is really anything to do with the investibility of the business, but it probably adds to my negative perception of the business as an investment.

Hopefully the believers see a nice run up in the share price this year.

 

[luutzu]

Don't forget they are opening in Britain so it will definitely increase hence their new finance arrangements.

They charge the retailer between 6 and 8 % of the sale.
They get it back the cash in installments over 6 weeks. Pretty good return in my view. Better than the retailer who has to buy the stock, display it and pay all costs.
2.2 billion in sales during recent 6 months, steadily increasing. You do the maths.

They are making a profit but obviously this much growth needs cash flow.
A bad credit record in the US is a big thing and since they won't lend you much at first (from memory $150), why would you get one for that?

Saw APT's boss doing a presentation for the ASX thingy... he said they charges small retailers upto 6%, the bigger guys 3.5% or so... so average margin is 4.1% on retailers.

In FY18 [?] its average costs of interest [charged to APT] was 3.6% or so. There's some preference/convertible at 7.2% but that's for some $46M so I guess not much.

Assume that interest rate will rise this FY19, or at least FY20... just to reflect the recent rises in the US.

So the cost they charge retailers vs the interests they pay to their bankers would break even.

SInce they don't charge interest on most of their members. I think they charge if you use credit cards instead of debit, but that's after 56 days?

Basically, they make money from late payment fees... and so far, <25% [according to their presentation] are late.

Question is, will the late fees be enough to turn a profit on? Assuming the initial roll out and retailer/member acquisition eventual costs nothing.

My reading of their stats says that default was 1%, they allowed for 1.5%. Profit from late fees around 2.6%. Net profit on all these activities would be 1.1% to 1.6%?

Expansion into the US could be trouble.

Remember that some 60% of them could not afford a $1,000 emergency.

so it's not a big deal to offer them no-check credit upfront.

What happen when an emergency occur? They declare personal bankrupt? Or delay and delay it costs APT more to chase up the payment?


Just being cautious... $3.8B for a yet to be profitable business that's lending to anyone with an ID over the internet, taking on all the liabilities with each "sales".

It's not hard to lend people interest-free money. Not hard either to charge 4% to retailers when you pay in full and move their goods quicker.

So the increase sales and rapid adoption by retailers is almost a given. Difficulties is whether or not interest rate costs can be passed on to retailers if the bankers demand higher rates; whether or not defaults are difficult and collection cost-effective.

 

[Smurf1976]

None of the above is really anything to do with the investibility of the business, but it probably adds to my negative perception of the business as an investment.

Hopefully the believers see a nice run up in the share price this year.

Long term I have a lot of doubts about it for the reasons you and others have mentioned.

Also, whilst I previously thought it would take longer, reality is that competitors are already active and becoming established so the "first mover" advantage won't last long.

In the short term though, well it all looks positive but not as a "bottom drawer" stock.

 

[sptrawler]

Saw APT's boss doing a presentation for the ASX thingy... he said they charges small retailers upto 6%, the bigger guys 3.5% or so... so average margin is 4.1% on retailers.

In FY18 [?] its average costs of interest [charged to APT] was 3.6% or so. There's some preference/convertible at 7.2% but that's for some $46M so I guess not much.

Assume that interest rate will rise this FY19, or at least FY20... just to reflect the recent rises in the US.

So the cost they charge retailers vs the interests they pay to their bankers would break even.

SInce they don't charge interest on most of their members. I think they charge if you use credit cards instead of debit, but that's after 56 days?

Basically, they make money from late payment fees... and so far, <25% [according to their presentation] are late.

Question is, will the late fees be enough to turn a profit on? Assuming the initial roll out and retailer/member acquisition eventual costs nothing.

My reading of their stats says that default was 1%, they allowed for 1.5%. Profit from late fees around 2.6%. Net profit on all these activities would be 1.1% to 1.6%?

Expansion into the US could be trouble.

Remember that some 60% of them could not afford a $1,000 emergency.

so it's not a big deal to offer them no-check credit upfront.

What happen when an emergency occur? They declare personal bankrupt? Or delay and delay it costs APT more to chase up the payment?


Just being cautious... $3.8B for a yet to be profitable business that's lending to anyone with an ID over the internet, taking on all the liabilities with each "sales".

It's not hard to lend people interest-free money. Not hard either to charge 4% to retailers when you pay in full and move their goods quicker.

So the increase sales and rapid adoption by retailers is almost a given. Difficulties is whether or not interest rate costs can be passed on to retailers if the bankers demand higher rates; whether or not defaults are difficult and collection cost-effective.

And here is me, thinking you had a social conscience and were worried about the little guy getting ripped off.

 

[sptrawler]

Long term I have a lot of doubts about it for the reasons you and others have mentioned.

Also, whilst I previously thought it would take longer, reality is that competitors are already active and becoming established so the "first mover" advantage won't last long.

In the short term though, well it all looks positive but not as a "bottom drawer" stock.

Could be a very good in / out, as long as one keeps ones eye on the big picture. lol

 

[luutzu]

And here is me, thinking you had a social conscience and were worried about the little guy getting ripped off.

Yea true. Maybe I should've just left APT carry on with their attempt at screwing the cash-strapped millennial with "free money", not realising they're the one who's getting it.

But yea, the founders and early investors have certainly done very well for themselves. Soon enough more idiotic fund managers will hop on board and possibly lose their pensioners a few billions.

 

[luutzu]

Could be a very good in / out, as long as one keeps ones eye on the big picture. lol

A $3.8B company that's losing money, whose business is to lend money without interest or collateral.

I shouldn't laugh 'cause its stock might double in a real hurry though. THe market seem to like "sales" and growth and cooler way to charge on a master card.

How come whenever I gamble on a spec I always lose money and some people could just double theirs without really trying. LIfe's unfair Homer.

 

[luutzu]

Here's a contradiction I see in APT's business model. One I believe will increase its risks as it tries to de-risk.

Say APT's interest expense goes up. Up due to higher RBA/Fed/Bankers demanding higher rate.

To pass on this risk they could try to raise that merchant/retailer's margin. Can't really increase the late fees too much, can't really start charging interests on members as that would change their business model.

Small retailers are currently being charge up to 6.5%... now, if retailers agree to any higher fees than that it's likely due to retailing being in pretty bad shape. Why would you agree to further discounts right?

When in bad condition, meaning they would have also mark down their merchanise, generally, already.

So retail is in a bad way for retailers to agree to take on more cost through APT.

Retail is slow because the general economy is tough. Tough economic condition increases the likelihood of default. Or late payment.

Since APT's model canned members who's late or defaulted; they cut off their source of revenue. Only opening business to those new, or those more capable of paying.

New increase risk; those who can pay will pay and so won't make APT much money anyway.

Share price will likely rocket up. Over the longer term though, business model is flawed.

 

[Skate]

Here's a contradiction I see in APT's business model. One I believe will increase its risks as it tries to de-risk.

Say APT's interest expense goes up. Up due to higher RBA/Fed/Bankers demanding higher rate.

To pass on this risk they could try to raise that merchant/retailer's margin. Can't really increase the late fees too much, can't really start charging interests on members as that would change their business model.

Small retailers are currently being charge up to 6.5%... now, if retailers agree to any higher fees than that it's likely due to retailing being in pretty bad shape. Why would you agree to further discounts right?

When in bad condition, meaning they would have also mark down their merchanise, generally, already.

So retail is in a bad way for retailers to agree to take on more cost through APT.

Retail is slow because the general economy is tough. Tough economic condition increases the likelihood of default. Or late payment.

Since APT's model canned members who's late or defaulted; they cut off their source of revenue. Only opening business to those new, or those more capable of paying.

New increase risk; those who can pay will pay and so won't make APT much money anyway.

Share price will likely rocket up. Over the longer term though, business model is flawed.

I would like to have my say about (APT) but I'll use APT as an example for the 'Dump it here' thread with chart references.

Found here: https://www.aussiestockforums.com/threads/dump-it-here.34425/page-99

Skate.

 

[peter2]

Interesting, thank you for your thoughts @luutzu.

How can a CEO state something that's not true without any public criticism? One would think the short funds would be all over this and making very public statements to support their short position.

 

[Knobby22]

Had a look Skate, trouble opening first image on my phone, on holiday at present.

I apologise for getting charge percentage wrong, did it by memory as not at home.

As Skate has shown, you have to look at the action.

I am bemused to see resistance based on it costing millenials more. In fact it allows them to avoid the credit card traps hence the banks are lobbying the government to limit them.
1 in 4 Australian millenials have used Afterpay including many of my nieces, who don't own credit cards. One did use them and got the debt as the bank desired.

There are definitely risks e.g. fraud, sure, but also may positives such as continuing success causing a takeover offer by say MasterCard or Google!
The brand name limiting any competition.
The continuing selection of the users that do pay back and the permanent removal of those who don't pay back in time reducing bad debts which appears to be occurring.

Some of the comments sound like old men in gentlemen's club poo pooing the internet as a passing fad.
Look at the charges for Amercan Express, PayPal etc. Many US companies make losses in the early years to build market share, I am sure you know many examples.


But you don't have to understand the business, as Skate shows technical analysis is enough. There will
be times to sell and times to buy.

One of my selections for this year's yearly comp. I may be wrong but to me it looks like a real winner.

 

[luutzu]

Interesting, thank you for your thoughts @luutzu.

How can a CEO state something that's not true without any public criticism? One would think the short funds would be all over this and making very public statements to support their short position.

It's just my opinions. So please don't sue me

Maybe what mgt said there is technically true [literally?]. In that it costs them more money to go collecting late fees and non repayment.

But if that is true, and I suppose the hourly costs to track down the member, writing them warning letters and threats of suing might end up costing more if they pay on time.

If true that they lose money, as in making losses, from collecting late fees... business will be in trouble.

See below... 4 to 4.1% is their annual (merchant) revenue. That's the actual revenue if we think of it like a business.

The $2.1846B in "sales"... that's just money they lent to their members. Money that's owed to APT from their members.

i.e. Their members spent $2.1846B at the shops. APT paid, on average, $2,184.6M - 88.3M = $2096.3. Thus, gaining a revenue of $88.3M. This is APT's actual "sales", not the $2.184B or the $2.096B it paid out.

If business were to operate as APT described above there... that is, it shuts down its late or defaulted members, leaving only the "good" ones who pays on time [i.e. not incurring any fees for using APT]... if business work out that way, then...

Best case scenario for APT is that, over time, all its default [close to 0%], with interest expense, recover costs; all the corporate overheads, the IT and admin, the sales and executive pay... all that will be lower than those collected from the merchants/retailers.

I can't imagine retailers giving APT 10% or 15% off just to move the stocks. I mean, couldn't they themselves do that?

If merchants were to raise the price to cover the extra costs for those APT clients... well they'll not attract the cash or other customers who could pay; might not even attract APT member themselves because why should anyone pay a higher marked price then the shop or online store next door?

Just my opinions. I don't short the stock and such.

 

[luutzu]

Had a look Skate, trouble opening first image on my phone, on holiday at present.

I apologise for getting charge percentage wrong, did it by memory as not at home.

As Skate has shown, you have to look at the action.

I am bemused to see resistance based on it costing millenials more. In fact it allows them to avoid the credit card traps hence the banks are lobbying the government to limit them.
1 in 4 Australian millenials have used Afterpay including many of my nieces, who don't own credit cards. One did use them and got the debt as the bank desired.

There are definitely risks e.g. fraud, sure, but also may positives such as continuing success causing a takeover offer by say MasterCard or Google!
The brand name limiting any competition.
The continuing selection of the users that do pay back and the permanent removal of those who don't pay back in time reducing bad debts which appears to be occurring.

Some of the comments sound like old men in gentlemen's club poo pooing the internet as a passing fad.
Look at the charges for Amercan Express, PayPal etc. Many US companies make losses in the early years to build market share, I am sure you know many examples.


But you don't have to understand the business, as Skate shows technical analysis is enough. There will
be times to sell and times to buy.

One of my selections for this year's yearly comp. I may be wrong but to me it looks like a real winner.

It's not hard to pay on people's behalf with little to no checks, no collateral.

I read the history of American Express before, how it came up with travellers' cheque, got into the new credit business.

The way they make money is not how APT is making theirs.

 

[luutzu]

Please feel free to correct me [as if I need to ask]....

But from my understanding, APT's a losing business model.

It's taking on too much risk for very little, very marginal, returns.

If interest rates, or APT's funding costs rise, shareholders better hope they can pass it on to the retailers through rising fees.

The move to the US can be problematic. Don't they have personal bankruptcy there where people can just go broke and it won't follow them [beside a bad credit record?].

So the increase "sales" reported is just increased liability.

View attachment 91471

Oh ey, I've made an error with my maths there. Was pointed out by someone...

The Merchant revenue of $88M is only 4% if it's over the total amount loaned out [2.1B+]... But APT churn over its capital [assets? loan book?] some 42days a year or so... So the $2B "underlying sales" is really only some $350M, not the entire amount of $2B, costing 3.8% or so.

Sorry about that...

However, and this, ladies and gentlemen... might scare you out of APT....

First... not that scary I supposed.... The total Revenue would be $142M

After operating expenses, exclude any one-offs and bonuses or mgt incentives, net operating income would be some $27M. Over that $350M loan book it's about 11% return.

If we use the total equity, or the total assets, operating return will halved or so.

This now get scary... or it coud be just me.

Default rate is not really 1.5%. It's about 1/4 of the company's revenue.

That is, of the money APT is to collect, some 22.87% [or $32.5M] is assumed impaired.