Coronavirus pandemic: BNPL player Afterpay feels the heat

We are living in an era where the customer is king, and businesses strive hard to provide the best customer friendly services possible. One such service is BNPL (Buy Now Pay Later) which has emerged in the past few years. According to a report by the Reserve Bank of Australia (RBA), there was an increase of 88 per cent in BNPL payments processed from 2017-18 to 2018-19.

However, the performance of the industry, just like the rest, has been hampered due to the global slowdown because of COVID-19 impact. The effect was also felt on sector index, S&P/ASX 200 Information Technology which has delivered negative returns of 30.66 per cent, 36.52 per cent and 31.40 per cent in MTD, YTD and one-year, respectively (As at 19 March 2020).

Afterpay Limited (ASX:APT), one of the high-profile companies offering BNPL services, has also had a difficult time recently. The significant fall in APT’s share price is due to the negative sentiments among investors concerning the Company’s operational performance amid the market slowdown. The investors are of the opinion that the Company’s growth could be limited by the virus threat and could lead to a rise in unrecoverable debts.

Let’s deep dive into APT’s stock performance and its recent activities.

APT’s stock price is on roller coaster ride:

The APT stock hit a 52-week high of $41.140 on 20 February 2020, a week before the release of its interim report FY 2020. However, a sudden fall in the Afterpay’s stock price has been witnessed since 9 March 2020.

APT closed the day’s trade down by 22 per cent to $9.9 on 19 March 2020. The stock has generated negative returns of 75.56 per cent and 65.60 per cent in the last month and last three months, respectively.

In response to the falling confidence of the investors as witnessed by the slumping stock price, the Company has made certain attempts via. making the following announcements:

APT’s CEO letter after the share rout:

Mr Anthony Eisen, APT’s CEO & MD, reassured the Company’s shareholders about APT’s strong position by releasing a letter dated 19 March 2020. Mr Eisen mentioned that the business model, customer base and the balance sheet of the Company holds protect them during times of an economic turmoil. It was confirmed that no material impact was seen on APT’s business activity, including the timing of repayments of instalment with no transaction failures to date.

Additionally, the letter included a business update that further details of APT’s performance during the three months ended 31 March 2020 would be released by the end of the month.

Further, some of the key facts shared by the Company that might be useful while considering its future performance were shared.

• Customers having a single overdue payment are not allowed to have access to APT’s services. Group's monthly underlying sales of over 90 per cent comes from its repeat customers.

• Due to the high-frequency purchasing and repayment rates of Afterpay, the average outstanding balances were around $211, and the average transaction value was nearly $150 with no material concentration from either customer or merchant perspective.
• Afterpay also said its receivables book was less than 30 days, which helped the Company in "identifying leading indicators early and modifying risk parameters in the system immediately".
• The duration of APT’s receivables book was less than 30 days. Afterpay mentioned that this short duration would help manage losses by spotting leading factors and adjusting risk parameters in the system instantly.
• With the average age of APT’s Australian customers being 34 years, the company figured out that their customers are under-indexed in lower income and over-indexed in high and middle household income brackets. Also, provided the average age of global customers as 33 years with 32 years in the US and 34 years in the UK.
• Regarding the liquidity position and balance sheet, the Company provided following updates on its funding position which was also released separately on 13 March 2020:
  • A strong liquidity position of more than $672.1 million.
  • The weighted-average life of debt facilities was 2.1 years. This is not subject to traditional debt covenants.
  • The proportion of warehouse facilities drawn stood at 33.3 per cent.
  • The proportion of funding relative to receivables facilities is marked at 47.6 per cent.
  • Cash on the balance sheet was $402.5 million.
  • With the major financial institutions, the Company holds warehouse facilities of more than $1.09 billion.

APT highlighted that most of its underlying sales (more than 75 per cent) were produced from online transactions. The Company plans to redirect a part of its existing budgeted marketing expenditure on supporting those merchants who are willing to expand their online exposure in the present environment.

US Regulatory Settlement:

On 17 March 2020, APT signed an agreement with the California Department of Business Oversight (DBO) to resolve a regulatory matter of services offered in California.

Under the agreement, DBO granted the finance lender’s licence to the Company’s wholly-owned subsidiary in the US by which APT is now allowed to offer its future and current products in California.

The settlement costs of $1.5 million were provided by APT, which includes the following:

• A refund of late fees of nearly US$905,000, which was previously paid by consumers of California.
• An administrative fee of around US$90,500 to the DBO which is equal to 10 per cent of the identified total late fees.

The Company appreciated the clarity gained in terms of regulations from this agreement and intends to work closely with the DBO. Additionally, to feature its commitment to consumer protection and compliance with the respective applicable laws at the state level, APT wants to continue the connection with regulators at the federal and state level throughout the US.

How have Other BNPL players fared?

The BNPL industry has been significantly affected by the coronavirus pandemic with almost all the players taking a significant hit. The returns of APT’s peers are mentioned below (as on 19 March 2020):

• EML Payments Limited (ASX:EML) slipped by 66.52 per cent on a YTD basis and ended the day at $1.45, down 5.844 per cent as compared to the previous close.
• Zip Co Limited (ASX:Z1P) settled at $1.175, down by 10.985 per cent from its previous close, with a negative return of 63.54 per cent and 62.71 per cent in the last 6-months and on a YTD basis.
• FlexigGoup Limited (ASX:FXL) fell 25.157 per cent compared to the previous day’s close with a drastic return of 57.37 per cent YTD.

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