Financial Services - Others│Australia│Equity research│August 23, 2018

Afterpay Touch
ADD (previously HOLD) First Australia then the world
Current price: A$18.55 ■ APT’s FY18 result numbers were in-line with guidance from the 4Q18 quarterly.
Target price: A$21.65
■ Initial signs from APT’s US expansion are highly encouraging, in our view. APT’s
Previous target: A$7.95
US sales and merchant numbers in July both doubled on the strong June number.
Up/downside: 16.7%
Reuters: APT.AX ■ An announced expansion into the UK adds to APT’s potentially strong growth
profile over numerous years, in our view.
Bloomberg: APT AU
Market cap: US$2,972m ■ We update our numbers for the result and the recent quarterly. We upgrade
A$4,040m FY19F/FY20F cash EPS forecasts by 8% and 34%. Our PT moves to A$21.65
Average daily turnover: US$17.30m
mainly on our earnings changes and an increase to our valuation multiples.
A$23.34m ■ Move to ADD. We have been too cautious on upside from an overseas expansion.
Current shares o/s 171.4m
Free float: 100.0%
Result summary
Price Close Relative to S&P/ASX 200 (RHS)
APT’s FY18 reported results were in-line with guidance from the 4Q18 quarterly, e.g.
16.5 550 revenue (inc other income) of A$142m and an EBTDA (ex significant items) of ~A$28m.
11.5 383 FY18 NPAT (-A$9m) was below consensus (+A$12m) impacted by higher share based
6.5 217 payments (A$16m) and a higher D&A charge (~A$17m) due to the Touchcorp
1.5
10
50 acquisition. The key result new disclosure was the FY18 net transaction loss ratio (0.4%)
8
6 which improved on FY17 (0.6%). In addition to the result, APT has announced a UK
4
expansion and a capital raising (~A$128m including SPP) which will fund the
Vol m

Aug-17 Nov-17 Feb-18 May-18 international expansion and cornerstone an international receivables debt facility.
Source: Bloomberg
US start is impressive
Price performance 1M 3M 12M Initial signs from APT’s US expansion are highly encouraging, in our view. We note
Absolute (%) 29 158.7 500. underlying US sales in July of US$20m were up from the June level of US$12m (a result
3
491. APT achieved 16 months before it did in Australia). Meanwhile US retailers who have
Relative (%) 29.7 155.3
7 signed contracts (800) and the number of US merchants transacting on the platform
(400) have doubled from the 19 July quarterly update. APT also disclosed it now has
Richard COLES 150,000 registered users in the US. Add to this recent commentary from Urban Outfitters
T (61) 2 9043 7911 noting Afterpay “has been a huge success” and it’s hard to doubt the momentum. With
just the US fashion market (US$60bn) 20x the size of the Australian fashion market,
E richard.coles@morgans.com.au upside potential on a successful US expansion remains significant, in our view.
Analyst(s) own shares in the following stock(s) UK expansion announced
mentioned in this report: APT has announced it will expand into the UK with the 90% acquisition of a UK-based
– N/A buy now, payer later operator (Clearpay). APT will rebrand this business and bring in its
own technology, while leveraging Clearpay’s existing relationships to enter the market -
a move it believes will accelerate entry and reduce risks. The APT UK launch will not
take place for several months with no material revenue contribution expected in 1H19.
The UK market is another large opportunity for APT being the third largest e-commerce
market in the world (£133bn). While risks exist, management is clearly moving fast to
seize a global opportunity and we take some comfort given early traction in the US.
Changes to forecasts and investment view
We update our APT numbers for the result and the recent quarterly. We upgrade APT
FY19F/FY20F cash EPS by 8% and 34% mainly on higher revenue growth assumptions.
Our APT price target is upgraded to A$21.65 on our earnings changes, a valuation roll-
forward and increased valuation multiples applied to reflect higher anticipated growth.
We move to an ADD recommendation. We have been too cautious on APT’s ability to
execute in the US, with initial signs of strong traction in this market. A successful UK
expansion would also add significantly to APT’s medium-term growth profile.

Financial Summary Jun-17A Jun-18A Jun-19E Jun-20E Jun-21E

Total Revenue (A$m) 29.0 142.3 276.1 484.5 786.6
EBITDA (A$m) 3.2 9.2 47.4 100.1 200.7
Normalised Net Profit (A$m) 1.1 -9.0 27.4 72.3 160.9
Normalised EPS (cps) 2.3 6.3 19.0 39.7 80.0
Normalised EPS Growth (%) na 183% 200% 108% 102%
EV/EBITA (x) 1271.8 450.1 88.3 43.4 22.0
FD Normalised P/E (x) 800.0 293.2 97.6 46.8 23.2
DPS (cps) 0.0 0.0 0.0 0.0 0.0
Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0%
P/BV (x) 24.6 21.8 12.2 10.0 7.2
ROE (%) 1.2 -5.3 9.7 19.2 32.8
SOURCE: MORGANS ESTIMATES
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Financial Services - Others│Australia│Equity research│August 23, 2018

Figure 1: APT - Financial summary

Com pany: Afterpaytouch Profit & loss (A$m ) FY17A FY18A FY19F FY20F FY21F
ASX code APT Recommendation ADD Revenue from ordinary activities 22.9 113.9 229.8 407.4 674.6
Bloomberg code APT AU Valuation $21.65 Cost of sales -5.3 -28.2 -50.9 -87.3 -142.2
Share price 18.55 Price target $21.65 Gross Profit 17.6 85.7 179.0 320.0 532.4
No. of shares (m) 216.2 Upside/(dow nside) 16.7% Other income - (Pay later - late fees) 6.1 28.4 46.3 77.1 112.1
Market cap (A$m) 4,010.6 Total other incom e 6.1 28.4 46.3 77.1 112.1
Year end Jun Bad and doubtful debt expense -8.2 -32.6 -59.8 -99.6 -144.7
Debt recovery costs including bank charges -1.0 -5.1 -9.7 -16.2 -23.5
Forecast sum m ary FY17A FY18A FY19F FY20F FY21F Employment expense -4.7 -22.2 -44.7 -75.2 -114.4
Normalised NPAT (A$m) 1.1 -9.0 27.4 72.3 160.9 Share based payments -1.8 -16.4 -4.4 -4.4 -4.4
grow th - % na na na 163.6 122.7 Other operating expenses -4.2 -22.0 -48.2 -82.4 -129.8
Reported net profit (A$m) -9.5 -9.0 27.4 72.3 160.9 Finance expense - funding receivables -0.8 -6.6 -11.1 -19.3 -27.0
grow th - % -363.0 na na 163.6 122.7 Total expenses -20.6 -104.9 -177.9 -297.1 -443.8
Normalised basic EPS (cps) 2.4 6.8 20.4 42.6 85.9 EBTDA 3.2 9.2 47.4 100.1 200.7
grow th - % na 183.4 199.9 108.4 101.8 Depreciation and Amortisation -2.7 -17.3 -20.7 -28.5 -40.5
Normalised diluted EPS (cps) 2.3 6.3 19.0 39.7 80.0 Operating profit/loss 0.5 -8.1 26.7 71.5 160.2
grow th - % na 183.4 199.9 108.4 101.8 Finance income 0.3 0.5 0.7 0.7 0.7
Reported diluted EPS (cps) -5.2 -3.9 11.6 30.1 66.9 Profit/(loss) before tax 0.8 -7.6 27.4 72.3 160.9
grow th - % na na na 159.4 122.7 Tax benefit /(expense) 0.3 -1.4 0.0 0.0 0.0
Dividend per share (c) 0.0 0.0 0.0 0.0 0.0 Norm alised NPAT 1.1 -9.0 27.4 72.3 160.9
grow th - % na na na na na Non-recurring items/one-offs - after tax -10.6 0.0 0.0 0.0 0.0
Statutory NPAT -9.5 -9.0 27.4 72.3 160.9
Valuation sum m ary FY17A FY18A FY19F FY20F FY21F
Price / earnings 800.0x 293.2x 97.6x 46.8x 23.2x Cash NPAT 4.2 14.6 45.0 95.3 192.3
EV / EBITDA 1271.8x 450.1x 88.3x 43.4x 22.0x
Price / book value 24.6x 21.8x 12.2x 10.0x 7.2x Dividend 0.0 0.0 0.0 0.0 0.0
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 Retained Earnings -9.5 -9.0 27.4 72.3 160.9

Grow th and m argins - % FY17A FY18A FY19F FY20F FY21F Balance sheet (A$m ) FY17A FY18A FY19F FY20F FY21F
Revenue grow th - % 1,635.3 390.4 94.0 75.4 62.4 Cash and cash equivalents 30 25 113 99 92
Expense grow th - % 548.0 409.4 69.6 67.0 49.4 Trade receivables 98 239 471 715 962
EBITDA grow th - % na 190.9 414.3 111.2 100.5 Inventory 0 0 0 0 0
EBITDA margin -% 10.9 6.5 17.2 20.7 25.5 Other current assets 21 41 40 40 40
PBT grow th -% na na na 163.6 122.7 Total current assets 149 306 624 854 1,094
ROE - % 1.2 -5.3 9.7 19.2 32.8 Property, Plant and equipment 4 4 5 8 12
ROIC -% 0.7 -3.2 5.5 9.9 16.8 Intangible assets 69 72 68 82 112
Other non-current assets 18 10 12 11 11
Cashflow (A$m ) FY17A FY18A FY19F FY20F FY21F Total Assets 240 392 710 956 1,230
NPAT 1.1 -9.0 27.4 72.3 160.9 Trade and other payables 23 43 77 108 147
D&A add back 2.7 17.3 20.7 28.5 40.5 Interest bearing liabilities 0 0 0 0 0
Net (inc)/dec in w orking capital -83.0 -128.3 -190.4 -212.7 -208.0 Other current liabilities 9 3 3 3 3
Other operating cashflow adjustments 0.4 14.6 0.0 0.0 0.0 Total current liabilities 32 47 80 112 151
Cashflow s from operations -78.9 -105.3 -142.3 -111.9 -6.7 Interesting bearing loans 47 162 289 430 502
Other non-current liabilities 2 1 1 1 1
Total Capex -0.5 -12.6 -25.5 -45.2 -74.8 Total Liablities 80 209 369 542 654
Other investing cashflow s 17.5 -1.6 0.7 0.7 0.7 Issued capital 171 193 322 323 325
Cashflow s from investing activities 17.0 -14.2 -24.8 -44.5 -74.1 Accumulated losses -13 -22 5 77 238
Reserves 2 13 13 13 13
Stock issuance 36.0 18.7 128.0 0.0 0.0 Total equity 160 184 340 414 576
Dividends paid 0.0 0.0 0.0 0.0 0.0
Inc/(dec) in borrow ings 37.3 99.8 127.3 141.1 72.3 Book value per share 0.8 0.8 1.5 1.8 2.6
Other financing cashflow s -1.5 -4.7 1.3 1.3 1.3 NTA per share 0.4 0.5 1.2 1.5 2.1
Cashflow s from financing activities 71.8 113.8 256.7 142.4 73.6 Net debt (A$m) (-is net cash) 17.1 136.1 175.5 330.5 409.9
Net debt to equity - % 10.7 74.1 51.6 79.8 71.1
Net increase/(decrease) in cash 9.9 -5.8 89.6 -14.0 -7.1 Net debt to EBITDA (x) 5.4 14.8 3.7 3.3 2.0
Interest cover (x) na na na na na
Valuation sum m ary
Preferred methodology: Blend

Ouput Input
EV/EBTDA multiple $22.50 29x FY21 EBITDA
PE multiple $20.80 26x FY21 earnings
Average $21.65 Unw eighted average
SOURCE: MORGANS ESTIMATE

Changes to forecasts and investment view

We update our APT numbers for today’s result and the recent quarterly. We
upgrade FY19F/FY20F cash EPS by 8% and 34% largely on higher revenue
forecasts. This reflects higher sales expectations in Australia and the US on
strong recent delivery and also incorporates the UK business into our numbers
(largely from 2H19). Our APT price target is upgraded to A$21.65 on our
earnings changes, a valuation roll-forward and increased valuation multiples
applied in our SOTP valuation (now 29x FY21F EBTDA and 26x FY21F PE).
Our higher valuation multiples reflect a stronger expected medium-term earnings
growth profile given traction in the US and potential growth in the UK. The
valuation multiples are broadly comparative with domestic IT peer - Wisetech.
We move to an ADD recommendation. We have been too cautious on APT’s
ability to execute in the US, with initial signs of strong traction in this market.

2
Financial Services - Others│Australia│Equity research│August 23, 2018

Successful UK expansion would also add significantly to APT’s medium-term

growth profile. Downside risks to our ADD call are: 1) slowing sales momentum;
2) competition affecting margins; 3) inability to execute on the overseas
expansion; 3) bad debt risk; and 4) higher funding costs

Figure 2: APT - Changes to forecasts

FY17A FY18A FY19F FY20F FY21F
Total Revenue (A$m)
Previous forecast 22.9 119.2 197.9 290.8 397.6
Current forecast 22.9 113.9 229.8 407.4 674.6
% change 0.0% -4.4% 16.1% 40.1% 69.7%
Growth % 1635.3% 390.4% 94.0% 75.4% 62.4%
EBTDA (A$m)
Previous forecast 3.2 22.4 57.0 97.0 150.5
Current forecast 3.2 9.2 47.4 100.1 200.7
% change 0.0% -58.9% -16.9% 3.1% 33.3%
Growth % na 190.9% 414.3% 111.2% 100.5%
Cash NPAT
Previous forecast -6.4 18.8 40.9 68.8 106.2
Current forecast 4.2 14.6 45.0 95.3 192.3
% change -166.0% -22.2% 10.0% 38.5% 81.1%
Growth % na na na 163.6% 122.7%
Cash EPS (cps)
Previous forecast -3.5 8.2 17.6 29.4 45.4
Current forecast 2.3 6.3 19.0 39.7 80.0
% change -166.0% -22.7% 8.0% 34.7% 76.1%
Growth % na 183.4% 199.9% 108.4% 101.8%
Dividend (cps)
Previous forecast 0.0 0.0 0.0 0.0 0.0
Current forecast 0.0 0.0 0.0 0.0 0.0
% change n/c 1.8% 4.0% 3.4% 3.5%
Growth % na na na na na
SOURCES: MORGANS ESTIMATES

Key themes
US expansion
 Early positive momentum with underlying US sales increasing from A$12m
in June to A$20m in July (66.67% gain sequentially).
 Over 800 US retailers have signed contracts (doubling month-on-month).
Circa 400 merchants currently transacting on the Afterpay platform.
 Over 150,000 US based customers have transacted to date.
 When questioned on bad debts and the Net Transaction Losses in the US,
the company stated it is relatively early and the business is operating “in line
with budgets and to the company’s expectations”.
 Looking forward, the company has said the U.S. pipeline remains strong and
“seasonal tailwinds should come into play during the remainder of CY18”.

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Financial Services - Others│Australia│Equity research│August 23, 2018

Figure 3: US integrated merchants Figure 4: Underlying merchant sales (A$m)

450 25 Title:
Source:
400
Please fill in the values above to have them entered in your report
20
350

300
15
250

200
10
150

100
5

50

0 0
May June July Mid-August June July

SOURCES: MORGANS, COMPANY REPORTS SOURCES: MORGANS, COMPANY REPORTS

Funding:
 A newly established A$200m receivables warehouse facility was announced
by the company with Citi.
 NAB’s group funding facility is A$300m, with A$116m drawn. The NZ$20m
facility remains undrawn at this stage.
 Pro forma $130m cash on hand (post the institutional raising and SPP) is
expected to be sufficient to fund international expansion costs and facilitate
$1bn of sales with existing capital.
 The company stated it has commenced the process of establishing a US
funding facility.

Europe:
 Afterpay has entered into a share purchase agreement to acquire 90% of
ClearPay, a UK based buy now, pay later enterprise (100% owned by
ThinkSmart) for 1m APT shares. Afterpay will transition the company over
the next 6 months while leveraging the local capabilities of the Clearpay
team and entity.
 Afterpay has an option to purchase the remaining 10% of ClearPay held by
ThinkSmart, exercisable after 5 years from completion.
 Liaising with local UK retailers will begin immediately in order to bring them
into the Afterpay ecosystem as soon as possible. Without any material
contribution to 1H19 numbers factored in, further UK strategy updates are
expected to be given at the company’s 1H19 results presentation.

Result:
 The key result item that impressed us was the decrease in the Net
Transaction Loss ratio (NTL) to 0.4% of FY18 sales versus 0.6% on pcp.
 FY18 Group Revenue (including Other Income) was $142.3m (per recent
guidance given at 4Q18 update), up 390% on pcp.
 The key negatives were: 1) the large increase in ‘non-cash share-based
payments’ to A$16.4m. This is mainly a mark-to-market accounting impact
due to the APT share price movement since the proposed grant of the
Group Heads LTI in August 2017. 2) D&A rose substantially to A$17.3m
(FY17 A$2.7m) mostly attributable to the Touchcorp merger. Obviously this
is non-cash.

4
Financial Services - Others│Australia│Equity research│August 23, 2018

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