Afterpay: Our sales just doubled again. UBS: You’re still worth $30
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Afterpay (ASX:APT) has released its latest half-yearlies, and resident hater UBS bank still ain’t impressed.
The BNPL market leader reported underlying sales of $9.8 billion for the six months to December 31, a gain of 106 per cent.
That flowed through to revenue of $417m (up 89 per cent), just shy of the UBS estimate of $432m.
UBS noted those were “strong sales and customer numbers”.
But the bank still has a bright red Sell rating on the stock with a 12-month price target of $30.
At the heart of the UBS view is the sheer rate of growth that is implied by APT’s current valuation.
A simple extrapolation of today’s half-year sales results in a rough full year estimate of around $20bn in FY21. In recent research, UBS said that figure will have to climb to $US170bn by 2025 to keep pace with the share price.
$30 is a discount of… a lot compared to APT’s current price of $134.36, where it sits in a trading halt in connection with a $1.25bn convertible note issue that it also flagged this morning.
In their snapshot appraisal of the H1 numbers, the UBS team led by analyst Tom Beadle said the convertible note offering was the “key news” in today’s announcement.
With funds from the capital raise, Afterpay said it will enter into an agreement (tender offer) with US venture capital fund Matrix Partners.
Matrix will waive 35 per cent of its interest in the company’s US subsidiary, Afterpay Inc, in return for $373m in cash.
In addition, APT will give eligible participants of its employee share ownership plan the option to exchange their shares at the same price as the tender offer.
Across both transactions, APT said it expects to increase its ownership of the US subsidiary from 80pc to 93pc.
As part of its expansion to the US, Afterpay has publicly flagged the importance of share-based remuneration plans in the chase to attract the best talent.
Back in 2019, a spokesperson for the company told the AFR that when it comes to share payment plans, APT can’t drop below the 90pc level.
But the effect of those share plans appears to have been dilutive to the company’s ownership share of Afterpay Inc to around 80pc — a lower figure than the minimum amount it previously flagged.
UBS noted that the tender offer effectively values APT’s US subsidiary at $10.6bn — about 28pc of Afterpay’s market cap.
“This is good for APT shareholders as it is less dilutive, but it implies a significantly lower nominal valuation for the US business than the current share price implies,” UBS said.
Beadle also noted that the $1.25bn convertible note issue follows on from a $1bn equity raise the company announced last July.
“We believe this vindicates our view that the market continues to mis-price or ignore how much capital is required to fund APT’s growth,” he said.
For Afterpay, UBS said that in terms of the free cash flow (FCF) it could theoretically release to shareholders once all expenses and debts have been paid, APT is sitting in a negative FCF position of $587m.
That negative figures is worse than the bank’s H1 2021 estimate of $532m, UBS said.
Top-line revenue growth is still one of the key metrics for BNPL, and while APT doubled up on that front the company is still loss-making.
However, APT said that excluding one-off items, underlying EBITDA would have been positive, at $47.87m.
Those one-off items included a “net loss on financial liabilities at fair value” of $64.8m, in connection with APT’s acquisition of the UK-based Clearpay.
There was also a one-off expense of $25.54m for share-based payments to employees.