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Why I think Afterpay Touch Group Ltd (ASX:APT) will run to $20

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Consumer financing company Afterpay Touch Group Ltd (ASX: APT) has gone into a trading halt to raise capital as it unveiled a surge in full-year profit this morning.

The group is capitalising on its record high share price which has surged 500% over the past 12 months to tap shareholders on the shoulder for more cash to fund its international expansion.

Afterpay is seeking to sell at least $108.1 million in new shares to investors through a placement at a price between $15.75 and $17.05 a share, according to the Australian Financial Review. This means the new shares will be offered at up to a 15.1% discount to its last traded price of $18.55.

The company is reportedly raising the cash to fund an expansion into the UK by acquiring a 90% stake in payments company ClearPay, which is owned by ex-ASX entity ThinkSmart Limited.

Interestingly, ThinkSmart had abandoned its ASX listing to try to chase its fortunes on the London Stock Exchange, but with limited success.

Afterpay will allow existing shareholders to participate in the raise through a share purchase plan (SPP) that will give shareholders the option to buy shares in lots up to $15,000 to raise another $20 million. The SPP is likely to be oversubscribed, in my view, so be prepared for a scale back.

News of the capital raise comes on the back of Afterpay’s full year results with revenue jumping 391% to $142.3 million and earnings before interest, tax, depreciation and amortisation (EBITDA) increasing 463% to $33.8 million.

The growth was driven by an increase in the number of merchants and end-customers using the Afterpay system, as well as its expansion into the US and contributions from the acquisition of Touch Corporation.

The company is capitalising on the trend for millennials to use debit cards for purchases over credit cards. Afterpay allows users to pay for purchases through interest-free instalments.

There are around 2.3 million active customers and nearly 18,000 merchants using Afterpay. This is likely to increase significantly this financial year given that Afterpay is only just gaining traction in the US. The UK won’t be far behind.

It makes strategic sense for the company to expand to other geographies as it will help mitigate regulatory risks with critics saying that such services should be better regulated in Australia. The UK is 2.6 times the addressable market size of Australia.

The stock could fall when it comes out of its trading halt (probably on Monday) as that typically happens to companies raising capital. But I doubt it will stay down for long.

It looks like the stock is set to run up to over $20 in the not-too-distant future.

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Returns as of 6th October 2020

Motley Fool contributor Brendon Lau owns shares of AFTERPAY T FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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