With reporting season fast approaching we highlight two companies whose results we will be watching closely: Afterpay Touch and Mineral Resources. We outline what we will be looking for in their reports to see if their incredible performance can continue.
Afterpay Touch: Will they win market share in the US?
Afterpay Touch provides a tweak to the traditional lay-by (layaway) model by allowing consumers to pay for products in 4 instalments while being able to use the product straight away, rather than the conventional method of waiting until all instalments are paid.
The customer benefits from immediate use of the product, while Afterpay removes the need for retailers to track and hold stock and payments, for a small 4% fee. Afterpay then essentially 'own' the customer who pays the instalments to Afterpay rather than the retailer.
Afterpay then becomes the 'destination' for the consumer who can efficiently compare product offerings at the Afterpay website; which leads to a virtuous cycle of lower customer acquisition costs, better credit quality over time and greater brand awareness and loyalty.
Strategically, we feel the value proposition Afterpay brings to the table is nothing short of brilliant. By being a 'no-cost' payment method to the consumer, it circumvents any claims of usury, genuinely reduces consumer costs via a no interest model, and drives incremental demand for retailers.
The datasets of consumers and their behaviours that they possess are also extremely valuable intellectual properties that are not reflected on their balance sheet. In addition, we view the platform as an equalising tool that independent retailers can use to differentiate themselves against the might of Amazon.
What we are looking for in their report
The key catalyst this reporting season will be an update on the company's progress in the USA, where Afterpay has managed to recruit a star-studded team.
The US retail market is over 15 times that of the Australian market; and lay-by is offered more widely relative to Australia. This has been validated by the quick uptake by US retailers; evidence suggests that Afterpay has managed to recruit more than 200 separate US retailers since launching in mid-May.
What gives us confidence is the validation in the model by consumers themselves. Starting from zero in 2015 it has managed to capture a full 25% of online fashion retail transactions in the Australian market. If Afterpay can replicate its Australian experience in terms of market share in the US, we expect the company to be worth multiples of its current price over time; and likely to be a takeover target by one of the large US based payment companies such as Visa, Mastercard or Paypal.
Mineral Resources: 3 key drivers to watch
Mineral Resources is an innovative diversified mining and mining services company. Its core business is to provide turnkey solutions covering all aspects of mining services. It also invests opportunistically in mineral projects itself and acts as a capital provider to smaller miners.
It has a large exposure to key strategic commodities in lithium, graphite and tantalum and makes use of a number of innovative technologies. Its managing director, Chris Ellinson, and its board hold circa 15% of the company providing good alignment with shareholders.
Over the past year, MIN has opportunistically bid for two other downstream companies in AWE (oil & gas) and AGO (iron ore). In both instances, they were outbid but refused to raise their offer.
This demonstrates sound capital discipline on the board's part. In the AGO instance, we believe much of the value was in the additional port access that would be available in Port Headland. Unfortunately, two heavyweights joined the fray in Fortescue and Hancock Prospecting; both likely vying for the same said port access. As a result MIN's share price has fallen by approximately 20% since the entry of the competing bidders.
The three potential catalysts in reporting season will be:
- The release of the pre-feasibility study for a lithium carbonate/hydroxide plant at the company's Wodgina deposit, claimed to be the world's largest hardrock lithium resource. MIN have broadly stated that a highly refined lithium end product will have approximately 4 times the value compared to it's existing Direct Shipping Ore operation.
- An update on its minority stake sale in Wodgina lithium operation, likely to a combination of global trading firms and end users. We think a premium price is achievable considering the project's scale and long life.
- Further clarity around the AGO takeover and subsequent port access in Port Headland. We feel the situation is likely to end in a stalemate with both Fortescue and Hancock holding blocking stakes. Hancock has been a customer of MIN's in the past so it's likely that an arrangement can be agreed around port access.
We expect the share price to trend higher from its current level of $15.50, towards $20.
Disclaimer: This article does not take into account your investment objectives, particular needs or financial situation; and should not be construed as advice in any way.