Afterpay: Silencing the doubters

Livewire Exclusive

When an Australian company achieves extreme success, there are always plenty of investors doubting the valuation and outlook. Just look at Blackmores, Corporate Travel Management, or Xero. Dean Fergie from Cyan Investment Management says the facts about Afterpay remain;

  • They will account for about $2B of retail sales in Australia this year
  • They have over a million consumer clients
  • They have over 14,000 retail outlets on their books.

“Any high-growth business never looks cheap. They’re always more expensive than those who aren’t invested in them believe they should be. As long as their growth keeps accelerating… I just don’t see any reason the stock price is going to go down for any significant period.”

Watch the full video below to hear Dean’s take on Afterpay’s US expansion.

Further Insights

Cyan is making meaningful investments in some of the most promising (and often overlooked) smaller companies listed on the ASX today. Find out how.


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Alex Wallis

You spent 3 minutes talking about a factoring business and did not once mention anything other than top line drivers. To me it is precisely this type of thinking driving the APT multiple. Back out the late fees and you have a credit experience which has tracked that of Australian credit card and other personal lending portfolios almost identically. If the origin of the business and its growth is to provide credit more readily and/or to those who cannot get a credit card, then arguably the loss experience will be exponentially higher than other forms of finance during a worsening credit quality cycle. One day the market will analyse the APT business like this and then it will trade at a discount to other consumer finance businesses - and rightfully this valuation will also be struck off balance sheet rather than revenue growth.

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James Marlay

Hi Alex, thanks for sharing your counter view on the stock and it's great to hear people with a view on the other side of the story and raising some of the risks. Please send us a note if you'd like to provide a more detailed submission outlining what you think some of the risks might be, I think it would be of interest to readers. I'd also add that Dean was one of the very early fund managers to share his views on Afterpay with his first article on the stock published here over 2 years ago (https://www.livewiremarkets.com/wires/why-afterpay-asx-afy-is-one-of-cyan-s-top-small-cap-picks). Thanks again for sharing your views.

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Theo Griepink

I bought APT early on and sold recently . I did well , thank you. I only take issue with the line:“Any high-growth business never looks cheap. They’re always more expensive than those who aren’t invested in them believe they should be. KGN was just such a business. And look at it now.

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Dean Fergie

Hi Alex, your comparison of APT to a traditional credit card business is quite common. There are a couple of nuances of the APT business model that are important and, I believe, make the company a markedly superior investment proposition. Firstly the payback cycle on any APT transaction is remarkably rapid, just 6 weeks in total. If any instalments is missed, no further purchases can be made through the platform. Secondly, the total transaction values are small, typically a maximum of $500. I think this makes APT less likely to incur significant bad debt provisions in a deteriorating credit cycle. Certainly, to date, this has been the experience with APT’s net transaction loss running at around 0.7%.

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Emanuel Datt

Alex, Dean has picked this company superbly, with great foresight. Your comments do indicate the degree of ignorance of the company's business model held by the wider investing public; which ultimately will benefit those who do understand the nuances of their business model.

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Alex Wallis

Dean - It has been a terrific call and I commend you for that! I agree on your comment re low balances positively impacting bad debt provisions, however I would argue that needs to be offset by a relatively high cost of recovery (i.e a higher loss given default), as well as the typical customer's underlying credit risk profile. Emanuel - I am looking forward to the granularity of the result as despite my "ignorance" I too look at top line. One thing to keep an eye on will be the receivables and perhaps more importantly the provisions which were topped up at the half yearly to a new high as a % of sales (doubling since FY16 on this basis). Overall, I am intrigued that late fees are becoming an increasing component of APT's margin. Question being, what happens under the new late fee framework in FY19? This looks an obvious headwind, albeit one that will likely pale into insignificance compared to the merchant/sales growth.

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Tony Wilson

Alex, I think you need to look a little more carefully at who Afterpay users actually are. Overwhelmingly, they are not prople who can't get a credit card because they are bad risks, they are people who don't want a credit card (or at least do not want to use it) because they are more prudent than the people who run up big credit card balances. Afterpay is popular with users precisely because it is small, short-term, and highly controlled debt. Users like it because they can't get into trouble with it; they remain in control. These are the very people you most want to be lending to: make great credit risks.

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Michael Whelan

Does it tell you, Dean and Emanuel anything that people are actually having to use APT as a synonym for a credit card ? Can't pay for it ? Hey, Afterpay it ! Just like a credit card. Just like Custom Credit (remember them ) who were "good sports with money", APT will be tested at some stage.

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