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Tuesday, 4 September 2018
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The APT Share Purchase Plan

I have had a few emails about Afterpay’s share purchase plan announced on August 23. Shareholders asking if they take it up.

Last week APT announced an institutional placement raising $117 million at a price of 1705c plus a $20 SPP. The announcement included results and upped guidance and a decision to move into the UK. Post the announcement the share price hit a high of 2300c (the next day) and is now at 1765c. APT is one of the largest holdings in the Marcus Today portfolio.

The recent share price spike and fall (down 23% from the top) has understandably worried a few shareholders - it has highlighted the volatility and risk in “popular” stocks like this. There is no reward without risk. This is not a stock you can be comfortable about, the numbers are guesswork, risky and unreliable.

This is also an illiquid stock (so it can move quickly) although it is no longer a small stock. It has a market capitalisation of $3.87 billion. After the recent guidance upgrade it is now on a PE of 137x falling to 59x falling to 28x then 13x in 2021 which tells you it is being priced, like all perceived growth stocks, on future earnings not the current year’s earnings.

Despite trading 450% above intrinsic value it is trading 22% below Morgans target price of 2165c and 30% below Ord Minnett’s target price of 2300c. Morgans has an ADD recommendation and Ord Minnett have an BUY recommendation. The interesting broker comment is that Afterpay has to pursue a global land grab in its space and should do so at the expense of short-term profitability, hence judging it on a PE ratio is shortsighted. Brokers can spin any story to feed a corporate deal, in this case a $117 million institutional capital raising and now a $20 million SPP (share purchase plan). There have been some chubby fees paid to brokers in the last week. They'll tell you anything and as the placement went to institutional and wholesale investors, they can pretty much say what they like and buyer beware. So understandably, they are optimistic.

The fall in the share price from the peak is hardly surprising. Lucky institutions, who did not have to be shareholders, just got offered an oversubscribed (we asked for $1.3 million worth and got $50,000 worth) offer of APT stock at 1705c and the next trade was at 2201c, which meant institutions that took the stock made an instant 29% profit. Effectively the brokers to the issue were handing out $34 million in cash to people that didn’t have to be shareholders and had no restrictions on selling the stock immediately into the market - so they did. (I would love to see the list of who they gave it to and whether they took any themselves). Brokers to the issue are Citigroup, Bell Potter and Wilson’s. Other brokers were also involved in placing stock and taking a commission.

With that sort of profit thrown at a fund manager or wholesale investor (big clients of the brokers) overnight, for next to no risk, can you blame them for selling it and can you now maybe understand why the share price has drifted back from the peak of 2300c to 1765c which represents just a 3.5% profit on the placement price of 1705c.

Basically what you have seen is all the privileged institutions that got offered stock taking their profits, and while this ridiculously inequitable structure of placing stock with people who don’t have to be shareholders (rather than having a renounceable rights issue), can you blame them.

Meanwhile shareholders like ourselves who have taken big risks in APT were effectively shut out and a pathetic $15,000 share purchase plan is no compensation.

Sour grapes aside - at this point there are two questions.

Do I sell because the share price is dropping?

There are too many extraneous factors that affect a highly priced share price like APT to be certain, but I am not selling it. Experience suggests to me that all we have seen is profit-taking by the lucky fund managers that got offered stock in the placement and as we get closer to the placement price at 1705c the selling will dry up, as it has done with the stock bottoming out at 1726c two days ago. Now 1765c.

So I don’t see this as the “big top” in the APT share price trend, just the “blip” caused by the share placement and the profit-taking. The APT story is better than it was before the announcement, they have raised $117 million, they have announced the expansion into the UK, they have announced results and improved guidance, yet the share price is lower (it is down from 1855c before the announcement). That looks more like an opportunity than a reason to sell. 

The main risk to a stock like APT is a general market collapse which will see high PE stocks like this at the forefront of the profit-taking. That aside I see the share price as having effectively fallen 4.8% on all the good news. That’s a product of greedy flippers taking a profit not a reflection of the story deteriorating or the existence of something you don’t know about APT.

So I’m still holding and think that (if the market behaves) the story and share price trend is still intact. In fact if I was to lose objectivity a moment and reveal my bias as a shareholder, I might even suggest that having been up to 2300c already, getting back there is a low mental hurdle for buyers. If the market behaves 1705c should mark the bottom because that’s the level at which none of those privileged institutions will bother taking a profit anymore.

Do I take up the share purchase plan at 1705c?

The SPP price will be a maximum of 1705c and the lower of 1705c and the volume weighted average price of the stock in the five days between September 11 and September 17.

If you are eligible (you had to be an Australian on the shareholder register on August 22) you will have received the SPP booklet, if not download it from the website. The opening date of the SPP is Friday, August 31. It closes at 5 PM on Monday, September 17. The shares will be issued on September 24 and commence trading on September 25. Holding statements will be dispatched the next day.

It’s not a big debate. All you need do is wait until a day or two before the offer closes (5 PM on September 17), make a judgement on the share price at that time, and decide whether to take it up or not. If the share price is above 1705c you take it up. For every 1% of discount on the share price a $15,000 application under the SPP is worth $150 (obviously). In which case if the SPP went off at 1705c and APT was trading at the current price of 1765c it would be a dsicount of $527. Probably worth it for most people.

As I say, just wait for the run into the closing date on Monday, September 17 and decide whether you think the share price is above or below 1705c and act accordingly.

Make sure you know how to accept the offer and how long it will take for your application under the SPP to get to the Registry, it has to be there before the close at 5pm on Monday 17. If you are sending a cheque you have to allow for the time it takes for the mail to get there. Read your booklet paperwork. The best way to accept is to pay by BPAY which the booklet says means you don’t have to return the Application Form.

Bottom line - At this point, as long as the share price is above 1705c you might as well take it up. It’s no biggie - with $15,000 you are only talking about 880 shares.

The rubbery numbers:

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