First, the business. Becoming a company that provides credit risk management services to companies for asset and cash poor Australian millennials seems not the most appealing of choices to be honest. But then, I am just a poor old Gen Xer after all.
And it is still pretty much an Australian business. Afterpay Australia has 86% of the Accounts receivable of the entire business.
Couple of things smell a bit off to me, based on info in the 2018 Annual report.
1. The company is primarily an Accounts Receivable business (around 77% by Revenue). They are paying the bills of their customer up front and then trying to recoup that expense. So the impairment of that Accounts receivable asset is key to the profitability of the business. At the moment, the total impairment is around 5.9%. When credit cards (with credit checks) in Australia are at around 7% write off, this is low by at least 3-5%.
2. The recognition of Late fees is interesting. In the notes it says
Revenue is recognised upon charge to end-customer at certain time points where late fees become applicable and are expected to be recovered
These late fees are also effectively being put into the Accounts receivable asset as well. If they are late paying the principle, they will probably be late paying the fee.
This is material as "Other Income" (or late fees) is around 25% of revenue.
3. The company is bleeding cash. Cash flow from operations is around $100 million in the red in 20-18. Being propped up by borrowings and share capital. Debt/Equity is around 86%, up from around 29% in 2017. And as the business by definition is going to depend on upfront cash, they are going to need a lot more debt.
4. Based on the Annual report, in 2019 they will be implementing accounting changes which will reduce the Asset base by around 3%
5. I can't see how they will be able to get away with not performing credit checks in the longer term. Banks are already treating afterpay accounts like credit cards when processing mortgage applications (which they basically are...an on-line version). So regulatory risk, especially when the results of the Royal commission/Labor government comes in this year, could see some downside to the stock.
6. Still has yet to make a profit.
So based on all that, I see some risk in that lofty share price.
NOTE: This is not a recommendation to invest/not invest in Afterpay. Please see your financial advisor before all investments including those in Afterpay
