BNPL run isn't over yet, analysts see plenty more upside

Buy now, pay later (BNPL) companies are all the rage in a cash-strapped consumer landscape as shoppers look for alternative ways to spread the cost of payment.

Analysts are seeing significant upside to share prices in some BNPL lenders such Afterpay (ASX:APT), which this week successfully completed a $650m share placement on the ASX priced at $66/share.

The capital raising and subsequent re-rating of Afterpay’s share price by market analysts could have positive spill-over effects for other BNPL companies such as Openpay (ASX:OPY), Splitit (ASX:SPT), and Zip Co (ASX:Z1P).

Splitit said yesterday June quarter merchant sales volumes were up 260 per cent at $US65.4m ($94.2m) on the same period last year and 176 per cent on the previous quarter.

In a prelude to its quarterly report, the company said the number of merchants using its service rose 104 per cent on the same period last year, and the number of unique shoppers was up 85 per cent, spending an average of $US893 each.

Meanwhile, Afterpay’s oversubscribed equity raising is going to be used to accelerate its global sales growth in key market segments including Australia and overseas, the company said.

Company co-founders and joint chief executives, Anthony Eisen and Nicholas Molnar, have taken the opportunity to each sell 2.05 million shares in the company at $66/share.

“The market has responded strongly to our aspiration to further accelerate our investment in growing underlying sales and expanding our global footprint, with the placement being oversubscribed,” Afterpay independent director Elana Rubin said of the equity placing.

Afterpay has grown its customer base to 9.9 million including 5.6 million in the US, an increase of 116 per cent on a year ago, while active merchants using its system rose 72 per cent year on year to 55.4 million.

Heady metrics

Afterpay’s Wednesday share price of $66.18/share means the company is trading at 23 times its book value, which on normal business metrics may appear quite heady for any ordinary company.

But some brokers suggest the company and others in the BNPL sector may have more room to grow as they roll out their business model to other parts of the globe.

Analysts at Swiss investment bank UBS said in a client note that Afterpay was “well positioned” to exceed its underlying sales target of $20bn for the 2022 financial year as it maintained “strong momentum in the business”.

Underlying sales for the 2020 financial year are at $11.1bn, UBS said.

According to ASX data, Afterpay has a current market capitalisation of $18.23bn.

“We highlight that APT’s shares have rallied +41 per cent since June 1 and did not trade above the $61.75 floor price [for the equity raising] until one week ago,” UBS analysts said.

Meanwhile, Bell Potter analysts adjusted their target price for Afterpay to $81.25/share, raising this from $65/share, in a July 7 client note posted after the company’s equity raising.

Turbocharged

The sensational increase in Afterpay’s target share price from the broker is based on the company’s potentially explosive earnings growth.

“Afterpay has taken the opportunity to increase its firepower to turbocharge its pursuit of the market opportunity before it and to de-risk the business,” Bell Potter analyst Lafitani Sotiriou said, adding that the company had flagged expansion into other countries in Europe and Asia.

“We see the European Union as the next obvious expansion point, otherwise somewhere closer to home in the South-East Asian region,” Sotirioue said.

One thing is for sure and that is BNPL sector companies are riding a strong wave of consumer popularity as their delayed payment model is embraced across the globe.