Implications of Afterpay’s $800 million capital raise

We examine the highlights and some of the key implications from the company’s just announced capital raise and trading update.

Implications of Afterpay’s $800 million capital raise

Buy now pay later (BNPL) darling Afterpay (APT) today announced plans to raise $800 million – made up of a $650 million fully-underwritten institutional placement and a non-underwritten $150 million share purchase plan.

As part of the institutional portion of the raise, the company expects to issue as many as 10.52 million new shares – at a floor price of $61.75 per share, representing a moderate discount to Afterpay’s last traded price.

In a statement to the ASX, the company said it would use the funds from the raise to drive underlying merchant sales growth, expedite global expansion opportunities, enhance long-term shareholder value and strengthen the firm’s balance sheet. Further afield, Afterpay also said it was exploring a variety of M&A opportunities to ‘accelerate [its] roll-out across potential new international markets.’

Commenting on the impact of the raise, UBS analysts this morning said:

‘Today's raising will de-risk APT's operating model without being significantly EPS dilutive, though it also supports our view on capital intensity. We highlight that APT's shares have rallied +41% since 1 June and did not trade above the $61.75 floor price until 1 week ago.’

Concurrently, Afterpay’s co-founders – Anthony Eisen and Nicholas Molnar – revealed they would be selling ~10% of their APT holdings, in a fully-underwritten sell-down, valued at an estimated $250 million.

Citigroup and Goldman Sachs are the joint lead managers of the raise.

Afterpay share price: trading update in focus

As part of today’s raise announcement, Afterpay (APT) also provided the market with details of its Q4 and expected full-year, FY20 performance. Overall, it proved to be another year of stellar growth for the company, with Afterpay reporting FY20 full-year underlying sales (GMV) of $11.1 billion, up 112%; and Q4 underlying sales of $3.8 billion, up 127%.

Yet it was underlying sales growth in the US – arguably Afterpay’s most important market – that was especially impressive, hitting $4.0 billion in FY20, implying a staggering year-over-year growth rate of 330%.

The company said this was 'driven by the introduction of new global enterprise retailers to the platform and an acceleration of e-commerce spending.’

On the earnings side of things, APT expects to report full-year earnings (EBITDA) of between $20-25 million, suggesting that the stock is trading on an incredibly rich multiple at current price levels – even for a fast growing tech company.

Indeed, although Afterpay’s stock is currently in a trading halt, at its last traded price of $68.00 per share – the BNPL company had an implied market capitalisation of $18.23 billion, making it larger than the likes of Aristocrat Leisure, Brambles, Scentre Group and Suncorp.

Elsewhere, active merchant numbers rose 72% to 55.4 thousand, while active customers more than doubled, reaching 9.9 million.

Finally, though Afterpay positions itself as a tech disruptor, the company nonetheless noted that in fiscal 2020 it expects full-year net transaction losses to have increased 55 basis points, though net transaction margins are reportedly expected to stay stable at ~2%. This figure, according to the company underpins 'a pathway to longer term profitability for the overall business.'

Last Thursday Citigroup raised their price target on APT 137% to $64.25 per share, though retained their Neutral/ High Risk rating on the stock.

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