Financial Services - Others│Australia│Equity research│April 11, 2018

Afterpay Touch
HOLD (no change) Some pros and cons
Current price: A$5.60 ■ APT has released its 3Q18 quarterly business update.
Target price: A$6.12
■ The key positives were good growth in customer numbers and a stable net loss
Previous target: A$6.34
ratio (~0.7%), with an update on APT’s US business expansion to be provided in
Up/downside: 9.3% May.
Reuters: APT.AX
Bloomberg: APT AU
■ The weakness, in our view, was a 4% sequential decline in quarterly merchant
sales (A$530m), although we acknowledge the December quarter is seasonally
Market cap: US$943.3m strong.
A$1,220m
Average daily turnover: US$7.86m ■ We lower FY18F/FY19F EPS by 6-7% on reduced APT merchant sales forecasts.
Our price target is lowered ~4% to A$6.12. Hold call maintained.
A$10.10m
Current shares o/s 171.4m
Free float: 100.0% What happened
Price Close Relative to S&P/ASX 200 (RHS)
APT has released its 3Q18 quarterly business update. The company delivered 3Q18
8.1 331 merchant sales of A$530m, up 266% on the pcp, but down 4% on the sequential
7.1 289
6.1 248 quarter. Merchant numbers (14,000) and customer numbers (1.8m) continue to grow
5.1
4.1
206
164
strongly, up 22% and 20% on the sequential quarter respectively. APT also reiterated
3.1 123 the key points from its recent market release on how the company ensures responsible
2.1 81
6
lending and why the fees it charges are not unreasonable. On these points, APT has
4
noted it will supplement its proprietary transaction engine with external ID verification
Vol m

2
checks from Llion (formerly Dunn and Bradstreet), with its late fees to be capped at
Jun-17 Sep-17 Nov-17 Feb-18
A$68 per order. These items are not expected to be material to earnings.
Source: Bloomberg

The good
Price performance 1M 3M 12M
Positively APT’s 2Q18 net customer numbers of 1.8m came in largely per our
Absolute (%) -28.2 -12.9 expectations. APT’s 3Q18 net transaction loss ratio (0.7%) also remains in line with
Relative (%) -26.4 -9.4 1H18, indicating no deterioration in credit quality. Management has said an update on
the US business expansion will be provided in May, which could indicate progress here
Richard COLES is more advanced than the market previously thought. Following on from a successful
pilot program, the Jetstar partnership will also be expanded and made available to
T (61) 2 9043 7911 Jetstar customers. Finally APT is well advanced on establishing a further A$200m
E richard.coles@morgans.com.au warehouse funding facility with an international bank.

Some areas of weakness

The weakness in the release, in our view, was a 4% sequential decline in quarterly
merchant sales (A$530m), although we acknowledge the December quarter is
seasonally strong. This decline was driven by a fall in average spend per customer
(A$321) versus the previous quarter (A$419) on our estimates. On late fees, while APT
has done a good job explaining the facts around these fees in our view, and is capping
late fees as mentioned, we still think the size of APT’s initial late fee per average
balance (5% - Morgans estimate) needs further justification.

Changes to forecasts and investment view

We lower APT’s FY18F/FY19F EPS by 6-7% on reduced merchant sales forecasts. Our
price target is lowered ~4% to A$6.12. We think APT’s remaining Australia/NZ
addressable market remains sizeable, with significant upside on any successful
penetration of the US market. However we see upside potential as arguably countered
by some risks and a full valuation at current levels. Hold call maintained.

Financial Summary Dec-16A Dec-17A Dec-18E Dec-19E Dec-20E

Total Revenue (A$m) 1.7 29.0 146.3 247.7 367.4
EBITDA (A$m) -1.8 3.2 22.4 57.0 97.0
Normalised Net Profit (A$m) -3.6 1.1 7.5 29.0 53.8
Normalised EPS (A$) -0.06 0.01 0.03 0.12 0.23
Normalised EPS Growth (%) na na 475% 283% 84%
EV/EBITA (x) na 380.3 60.2 25.4 16.4
FD Normalised P/E (x) na 956.8 172.3 44.9 24.4
DPS (A$) 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) 24.2 7.4 6.3 5.1 4.2
ROE (%) 0.0 1.2 4.3 13.7 20.1
Source: Company data, Morgans forecasts SOURCE: MORGANS, COMPANY REPORTS

IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE Powered by EFA
FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP
Financial Services - Others│Australia│Equity research│April 11, 2018

Figure 1: APT - Financial summary

Com pany: Afterpaytouch Profit & loss (A$m ) FY16A FY17A FY18F FY19F FY20F
ASX code APT Recommendation Hold Revenue from ordinary activities 1.4 22.9 119.2 197.9 290.8
Bloomberg code APT AU Valuation $6.12 Cost of sales -0.3 -5.3 -29.7 -44.4 -61.7
Share price 5.60 Price target $6.12 Gross Profit 1.1 17.6 89.5 153.5 229.0
No. of shares (m) 212.4 Upside/(dow nside) 9.3% Other income - (Pay later - late fees) 0.3 6.1 27.1 49.8 76.6
Market cap (A$m) 1,189.5 FY18F Implied cash PE 188.6x Total other incom e 0.3 6.1 27.1 49.8 76.6
Year end Dec Bad and doubtful debt expense -0.6 -8.2 -38.1 -70.1 -107.8
Debt recovery costs including bank charges 0.0 -1.0 -5.7 -9.7 -15.0
Forecast sum m ary FY16A FY17A FY18F FY19F FY20F Employment expense -1.2 -4.7 -21.2 -30.4 -38.8
Normalised NPAT (A$m) -3.6 1.1 7.5 29.0 53.8 Share based payments -0.2 -1.8 -5.8 -1.1 -1.1
grow th - % na na 601.3 289.4 85.3 Other operating expenses -1.1 -4.2 -18.7 -26.2 -32.7
Reported net profit (A$m) -3.6 -9.5 7.5 29.0 53.8 Finance expense - funding receivables 0.0 -0.8 -4.7 -8.8 -13.2
grow th - % na -363.0 na 289.4 85.3 Total expenses -3.2 -20.6 -94.2 -146.3 -208.7
Normalised basic EPS (cps) -5.6 0.6 3.5 13.3 24.5 EBITDA -1.8 3.2 22.4 57.0 97.0
grow th - % na na 474.7 283.2 83.8 Depreciation and Amortisation -2.2 -2.7 -10.3 -15.8 -20.4
Normalised diluted EPS (cps) -5.6 0.6 3.2 12.4 22.9 EBIT -3.9 0.5 12.1 41.2 76.7
grow th - % na na 474.7 283.2 83.8 Finance income 0.2 0.3 0.3 0.3 0.2
Reported diluted EPS (cps) -5.6 -5.2 3.2 12.4 22.9 Finance expense - ex receivable funding 0.0 0.0 0.0 0.0 0.0
grow th - % na na na 283.6 83.9 Profit/(loss) before tax -3.8 0.8 12.4 41.5 76.8
Dividend per share (c) 0.0 0.0 0.0 0.0 0.0 Tax benefit /(expense) 0.1 0.3 -5.0 -12.4 -23.1
grow th - % na na na na na Norm alised NPAT -3.6 1.1 7.5 29.0 53.8
Non-recurring items/one-offs - after tax 0.0 -10.6 0.0 0.0 0.0
Valuation sum m ary FY16A FY17A FY18F FY19F FY20F Statutory NPAT -3.6 -9.5 7.5 29.0 53.8
Price / earnings na 958.5x 172.6x 45.0x 24.5x
EV / EBITDA na 381.0x 60.3x 25.5x 16.5x Dividend 0.0 0.0 0.0 0.0 0.0
Price / book value 24.3x 7.4x 6.3x 5.1x 4.2x Retained Earnings -3.6 -9.5 7.5 29.0 53.8
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0
Balance sheet (A$m ) FY16A FY17A FY18F FY19F FY20F
Grow th and m argins - % FY16A FY17A FY18F FY19F FY20F Cash and cash equivalents 20 30 23 18 11
Revenue grow th - % na 1,635.3 403.9 69.3 48.3 Trade receivables 7 98 262 406 609
Expense grow th - % na 548.0 357.2 55.3 42.7 Inventory 0 0 0 0 0
EBITDA grow th - % na na 608.3 154.3 70.1 Other current assets 1 21 40 40 40
EBITDA margin -% -105.5 10.9 15.3 23.0 26.4 Total current assets 28 149 324 464 659
PBT grow th -% na na 1,440.9 233.8 85.3 Property, Plant and equipment 0 4 5 6 8
ROE - % 0.0 1.2 4.3 13.7 20.1 Intangible assets 11 69 67 57 46
ROIC -% 0.0 0.7 2.5 6.5 8.8 Other non-current assets 1 18 33 60 87
Total Assets 39 240 429 587 800
Cashflow (A$m ) FY16A FY17A FY18F FY19F FY20F Trade and other payables 1 23 42 56 77
NPAT -3.6 1.1 7.5 29.0 53.8 Interest bearing liabilities 0 0 0 0 0
D&A add back 2.2 2.7 10.3 15.8 20.4 Other current liabilities 0 9 9 9 9
Net (inc)/dec in w orking capital 0.0 -83.0 -144.8 -130.4 -181.6 Total current liabilities 1 32 51 65 86
Other operating cashflow adjustments -6.9 0.4 -21.4 -27.2 -27.2 Interesting bearing loans 0 47 185 280 419
Cashflow s from operations -8.3 -78.9 -148.4 -112.8 -134.7 Other non-current liabilities 0 2 1 1 1
Total Liablities 1 80 237 346 505
Total Capex -3.0 -0.5 -8.4 -7.6 -11.2 Issued capital 42 171 192 212 212
Other investing cashflow s 0.1 17.5 0.3 0.3 0.2 Accumulated losses -4 -13 -6 23 77
Cashflow s from investing activities -3.0 17.0 -8.1 -7.4 -11.0 Reserves 0 2 6 6 6
Total equity 38 160 192 241 295
Stock issuance 33.0 36.0 18.9 20.0 0.0
Dividends paid 0.0 0.0 0.0 0.0 0.0 Book value per share 0.2 0.8 0.9 1.1 1.3
Inc/(dec) in borrow ings 0.0 37.3 136.3 95.0 138.4 NTA per share 0.2 0.4 0.6 0.8 1.1
Other financing cashflow s -2.0 -1.5 -5.4 0.0 0.0 Net debt (A$m) (-is net cash) -19.7 17.1 162.3 262.4 408.1
Cashflow s from financing activities 31.0 71.8 149.8 115.0 138.4 Net debt to equity - % -51.8 10.7 84.5 108.8 138.4
Net debt to EBITDA (x) 11.2 5.4 7.2 4.6 4.2
Net increase/(decrease) in cash 19.7 9.9 -6.7 -5.1 -7.3 Interest cover (x) na na na na na

Valuation sum m ary

Preferred methodology: Blend

Ouput Input
EV/EBITDA multiple $5.72 20x FY20 EBITDA
PE multiple $6.52 25x FY20 earnings
Average $6.12 Unw eighted average
SOURCE: MORGANS ESTIMATES

Changes to forecasts and investment view

We lower APT’s FY18F/FY19F EPS by 6-7% on reduced merchant sales
forecasts. Our price target is lowered ~4% to A$6.13. We think APT’s
remaining Australia/NZ addressable market remains sizeable, with significant
upside on any successful penetration of the US market. However we see upside
potential as arguably countered by some risks and a full valuation at current
levels. Hold call maintained.

2
Financial Services - Others│Australia│Equity research│April 11, 2018

Figure 2: APT - Changes to forecasts

FY16A FY17A FY18F FY19F FY20F
Total Revenue (A$m)
Previous forecast 1.4 22.9 123.0 206.0 294.9
Current forecast 1.4 22.9 119.2 197.9 290.8
% change 0.0% 0.0% -3.1% -3.9% -1.4%
Growth % na 1635.3% 403.9% 69.3% 48.3%
EBITDA (A$m)
Previous forecast -1.8 3.2 23.6 60.3 100.3
Current forecast -1.8 3.2 22.4 57.0 97.0
% change 0.0% 0.0% -5.0% -5.5% -3.3%
Growth % na na 608.3% 154.3% 70.1%
Normalised NPAT (A$m)
Previous forecast -3.6 1.1 8.1 30.9 56.0
Current forecast -3.6 1.1 7.5 29.0 53.8
% change 0.0% 0.0% -7.6% -6.1% -3.9%
Growth % na na 601.3% 289.4% 85.3%
Cash EPS (cps)
Previous forecast -5.6 0.6 3.5 13.3 23.8
Current forecast -5.6 0.6 3.2 12.5 22.9
% change 0.0% 0.0% -7.6% -6.1% -3.9%
Growth % na na 474.9% 283.4% 83.8%
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

3
Financial Services - Others│Australia│Equity research│April 11, 2018

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individual’s relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees,
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