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Afterpay halves loss, doubles revenue

But the BNPL star is overvalued in the eyes of Morningstar's Shaun Ler because it remains a finance company and must be valued like one.  


Afterpay (ASX: APT) has halved its annual loss and doubled its revenue on the back of a widening geographical footprint and a surge in online spending amid covid restrictions.

The buy now, pay later operator reported a net loss of $19.8 million for the 12 months ended June 30, down from $42.9 million a year ago, in what Morningstar analyst Shaun Per described as an “unsurprisingly strong” result.

Earnings before interest, taxation, depreciation and amortisation (EBITDA) rose 73 per cent rise to $44.4 million, while revenue was up 97 per cent to $519 million, including $69 million from late fees.

Underlying sales revenue more than doubled to $11.1 billion. It did not declare any dividend.

“Buy now, pay later will continue growing and taking market share from credit cards. They will also continue to grow because you've got this structural trend with e-commerce. So you've got two really strong supporting points for Afterpay,” Ler said.

Afterpay said the number of active customers more than doubled to 9.9 million in its key markets across Australia, New Zealand, the US and UK.

Active merchants rose 72 per cent over the year to 55,400.

An average of 17,300 new customers were added to its books each day in of FY20, with growth accelerating as the coronavirus pandemic took hold and lockdowns forced people to turn to online shopping.

“It is clear that Afterpay’s predominantly e-commerce and budgeting focused service has been a net beneficiary of the significant shift to online spending,” the company said.

Afterpay said its net transaction loss was better than previously expected, rising to $42.8 million, or 0.4 per cent of underlying sales.

Afterpay (APT) - 1YR

Afterpay (APT) - 1YR

Source: Morningstar Premium

Earlier this week, Afterpay announced it would expand into Spain, France and Italy through the $82 million acquisition of Pagantis. On Thursday, the company said it is now available in Canada after signing up with retailers there.

Afterpay also announced the acquisition of Singapore-based EmpatKali, which operates in Indonesia, to explore opportunities to enter "select Asian markets".

Morningstar’s Ler said this was in line with Afterpay’s strategy of expanding into new markets.

“Their average transaction size is about $150 so the margins you earn on this are very small. In order for them to cover their fixed costs, they need to aggressively grow into different markets, so this geographic expansion plays a big role,” he said.

Buy now, pay later operators including Afterpay, Zip pay, Sizzle and Klarna have been racing with each other to build scale so they can lock in merchants and create a network effect.

“The reason they want to rush is because everyone else is offering the same thing. So, the only way to beat competition is to quickly build a big customer base. That is what Afterpay has done very well,” Ler said.

Afterpay said it expects the growth in customers and merchants to continue in the current fiscal year.

Shares in the company hit a fresh record high on Thursday, but have moderated since to trade at $91.21 each.

Ler expects to slightly upgrade Morningstar’s current fair value estimate of $24.10 a share to incorporate the European acquisition but said the stock will still be far overvalued to his estimate.

“The first reason is because our forecasts incorporate a moderation in its future growth. There is a very high risk that you can expect some form of regulatory action,” he said.

Corporate watchdog ASIC is expected to release a report into Australia’s buy now, pay later sector in coming weeks and this could lead to potential fresh regulation.

Afterpay has said it is still considering a report by an independent auditor into its anti-money laundering procedures.

Ler said the other reason for the difference in valuation is that Afterpay is essentially a customer-financing company like a bank.

“It's very fast growing but at the end of the day it is still a finance company and needs to be valued like one. So, because it grows its receivables it needs to get enough debt or equity funding to finance growth,” he said.

“Other analysts apply a tech-based multiple like they would for an eBay, Amazon or Google. That isn’t right because these tech companies don't need capital to grow, whereas Afterpay does.”

Visit Morningstar's Reporting Season 2020 coverage. The calendar will be updated daily to connect you with our equity analysts' take on the financial results.

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