Could the UK help boost Afterpay’s Q2 performance?

Afterpay share price continues to defy the sceptics

Market darling Afterpay (APT) continues to impress, finishing out Tuesday’s session firmly above the $100 mark, on an implied market capitalisation in excess of $28 billion. YTD APT is up 230%.

This sustained run up in value comes after the company posted another set of solid results in late October. Here, as part of its Q1 FY21 results, Afterpay reported:

• Strong volume growth, with underlying sales rising 115% to $4.1 billion
• Active customers hit 11.2 million, up 98%
• Active merchants hit 63.8 thousand, up 70%
• The company also revealed that on average, its Australian and New Zealand customers transact with the service 54 times annually, across 11 different verticals.
• Merchant revenue margins were 'firm' while gross losses trended lower.
• Net transaction margins were maintained in Q1

With the company’s Q1 FY21 known, and a number of other companies in the BNPL space releasing monthly or quarterly updates recently, the market is likely now wondering what kind of figures Afterpay will report as part of its Q2/ H1 FY21 results.

Alternative data points at a glance

Laybuy, a smaller competitor in the BNPL space, recently posted a strong set of first-half FY21 results to the market, recording robust volume, income and customer growth. Yet it was the companies performance in the UK which might prove to be most relevant to Afterpay’s upcoming Q2/H1 release.

Overall, across the first half of FY21, LayBuy recorded total gross merchant value (GMV) of NZ$244.8 million, representing an increase of 167% on a PcP basis. These results were driven by a strong performance from LayBuy’s UK operations, which UK GMV hitting NZ$212.5 million, up NZ$196.0 million on a PcP basis.

The performance of LayBuy’s UK division also saw group revenue surge, coming in 151% higher, at NZ$13.3 million.

Beyond those statistics, defaults fell during the half, while active merchants and active customer growth continued to rise.

Looking ahead, LayBuy's MD, Gary Rohloff said:

'Setting the foundations for growth, Laybuy has expanded its debt facilities and raised capital on the ASX, which together with its capital efficient business model supports annual GMV growth of approximately NZ$4 billion. This sets us up well to capitalise on our differentiated offering and highly scalable and flexible technology platform to capture the substantial growth opportunity in both the UK and Australian market.'

Mr Rohloff also added that:

'In October and November, we have continued to see strong momentum in our operating metrics,' with it unsurprisingly being added that ‘'Ahead of Christmas we expect further growth supported by Black Friday and Cyber Monday.'

What does this all mean for Afterpay?

Analysts from Wilsons have suggested that LayBuy’s recent operational performance bodes well for Afterpay, with the UK’s current lockdown potentially having the effect of providing a ‘shot in the arm’ for the company. Ultimately, the broker notes that while the Holiday season is historically strong for companies in the BNPL space, LayBuy’s recent performance nonetheless acts as encouraging confirmation that these trends remain intact.

Looking at the impact of the UK lockdowns, it was noted that:

‘While UK lockdown measures have forced consumer behaviour to continue to move towards online and away from in-store, this sets the stage for a further tailwind to APT’ UK performance, given in-store is yet to be rolled out and the market also isn’t pricing in any contribution to H1’21 results.’

Analysts from Wilsons went on to point out that:

‘Anecdotal evidence suggests there may also be a pull-forward of purchase behaviour in the UK in the lead-up to Christmas, as recent UK consumer polls suggest a preference to having December “locked down” rather than the structured tier-based restrictions proposed by the Johnson government come December 2nd.’

Quantifying how these behaviour changes and anecdotal evidence may impact the UK portion of APT's Q2/H1 FY21 release, Wilson’s analysts are currently forecasting that across the H1, APT will have 1.6 million UK customers, against underlying sales of AUD$692 million and total revenues of AUD$25 million.

Wilsons remains one of the largest Afterpay bulls of all the brokers covering the stock, assigning the fast growing company an Overweight rating and $113.94 price target. Though Wilsons is particularly bullish, this is not a solitary view, with the average analyst rating on APT currently standing at Overweight, according to the Wall Street Journal.

Regulatory intervention can’t dissuade traders

This bullishness comes even as the prospect of regulatory intervention looms large over the sector, with the Australian Securities and Investments Commission last week announcing a new set of regulatory obligations for BNPL companies.

These obligations, said the corporate regulator, ‘will require the industry to design fit-for-purpose products that meet consumer needs. They will also need to take steps to ensure their products are reaching the right consumers.’

Afterpay responded confidently to the prospect of increased regulatory oversight, again taking the chance to stress its consumer-friendly product design.

Afterpay (APT) closed out Tuesday's session up 2.47%, at $101.14 per share.

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