Best Ideas 2018
Joe Magyer
Disclaimer
The following is not intended to be financial advice and, to the extent that it is, it is only general in nature and does not
take into account the reader’s investment objectives, financial situation or needs. The information contained in this
presentation was not prepared by One Managed Investment Funds Limited (OMIFL) ACN 117 400 987, but was
prepared by other parties. Any person reading this document should seek professional advice and perform their own
due diligence before deciding to invest in or continue to hold the investment in any other security mentioned.
The information included in this document may include information that is predictive in character which may be affected
by inaccurate assumptions or by known or unknown risks and uncertainties and may differ materially from results
ultimately achieved. Investors should consider the PDS dated 11/12/2017 issued by OMIFL before making a decision to
invest in the Fund. You should also consult a licensed financial adviser before making an investment decision in relation
to the Fund.
Whilst all care has been taken in preparation of this document, to the maximum extent permitted by law,
neither Lakehouse Capital (ACN: 614 957 603) (Authorised Representative of AFSL 400691) nor One Managed
Investment Funds Limited (ACN 117 400 987) (AFSL 297042) will be liable in any way for any loss or damage suffered
by you through use or reliance on this information. Lakehouse Capital’s and OMIFL’s liability for negligence, breach of
contract or contravention of any law, which cannot be lawfully excluded, is limited.
Lakehouse, its directors, clients, employees and affiliates, may, and likely do, hold units or securities in entities that are
the subject of this report.
Data in this presentation is current as of 19 December 2017.
Lakehouse Capital: About Us
Fast Facts Security Selection
• Formed in 2016 • Strong positions in growing
• ≈ A$200 in FUM markets
• Based in Sydney, AU • Pricing power
• Durable competitive
Style advantages
• Long-Term • Aligned and experienced
management
• Low Turnover
• High Conviction
• Conservative balance sheets
• High Active Share • Attractive valuations
Lakehouse Capital: Funds
Lakehouse Small Companies Fund
• Launched November 2016
• ≈ A$134 million in assets
• Focused on small-caps in Australia and New Zealand
• Closed to new investors as of year-end.
Lakehouse Global Growth Fund
• Launched November 2017
• ≈ A$66 million in assets
• Focused on mid- and large-caps in developed markets
Afterpay Touch Group
Fast Facts Market Data
• ASX:APT • Recent Price: $5.56
• Formed: June 2017 • Market Capitalization: $1.2B
• HQ: Melbourne, Australia • ADTV: ≈$5M
All currency references in Australian dollars (AUD).
Afterpay Touch
Afterpay: Pay Later
• Consumer payment platform
• Take home now, pay in 4
interest-free installments
• Allows 1.3M+ users to buy
now and pay later at 10,000+
merchants across AU and NZ
Touch: Pay Now
• Payment processor
• Underpins Afterpay
Sources: Company filings.
The Big Idea
Significant Growth
• 0 to 1M+ Afterpay users in just 3 years
Strengthening Network Effect
• Rapid growth in users, merchants, and spend per user
Multiple Growth Levers
• Room to gain share of growing online category, go into more storefronts, and go
abroad
Attractive Economics
• Low net transaction loss rates and high capital velocity
Recent History
Afterpay
• Founded: 2014
• IPO: May 2016
• Co-founded by Anthony Eisen and Nick Molnar
• Seeded and supported by Touchcorp
• Series of expectations-beating results
Afterpay & Touchcorp Merger in June 2017
• Strong strategic sense
• CEO of Touchcorp had died suddenly
• Touchcorp owned 27% of Afterpay
• Afterpay’s business sat on top of Touchcorp’s platform
Source: Company filings.
Afterpay: How it Works
Note: Many
retailers
promote
Afterpay prior
to other
payment
options
Source: David Jones website.
Source: Company filings.
Afterpay: Google Trends (AU)
Source: Google Trends.
Retailers Promoting Afterpay
Afterpay does not pay for these placements or spend money on outbound marketing to merchants.
Source: Country Road and David Jones websites.
Afterpay Value Proposition
Consumers Merchants
• Buy now, pay later • Bigger orders
• Straightforward • Higher conversation rates
• No interest • Eliminates chargebacks
• No establishment fees • Simplifies layby programs
• Widely accepted • Popular with consumers
Self-Reinforcing Dynamics
More More
More Smarter
Transactio Transactio
Merchants Lending
ns ns
More
More Data
Users
Evidence: Rising Spend per Evidence: Falling Net Transaction
User Loss Rates
Fraud & Risk Management
Dynamic Model
• Proprietary algorithms, not credit scores
• Real-time assessment of individual transactions
• Enhanced by Touchcorp customers (e.g. Optus)
Transaction Statistics
• ≈25% of transactions rejected
• >80% of transactions by value by returning customers
• Transactions linked to cards
• ≈ 85% debit
• ≈ 15% credit
Source: Company filings.
Transaction Integrity Engine
Transaction Factors
• Location
More
• Merchant Smarter
Transactio
Lending
• Item ns
• Card history
• User history
• User address history
• Operating system More Data
• And more…
Growth Drivers
Existing Market Focus Adjacent Drivers
• More merchants • New verticals
• 29 new adds a week • Travel pilot underway
• More users • Beyond apparel
• 1.3 million today • New markets
• PayPal at 6-million-plus • New Zealand test tube
• Higher spend per user • In-store retail
• Up 28% YOY • Promising early returns
Sources: Company filings, websites, and Lakehouse calculations.
Management Team
Led by Co-Founders
• Anthony Eisen: Executive Chairman
• Nick Molnar: CEO of Afterpay
Strong Alignment
• Own combined 23.3% of company
• Did not sell into May 2016 IPO
• Escrow until May 2018
Afterpay Economics
Transaction Level
• Take rate: 4.1%
• Net Transaction Margin: 2.5%
• Net Transaction Loss Rate: 0.6%
Balance Sheet
• Recycling Capital ≈ 30 Days
• Credit Facilities: ≈ 370 Million
Source: Company filings.
Source: Lakehouse estimates.
Operating & Financial Data
FY2017 Pro-Forma LHC FY2018 Estimate 𝚫
Ending Afterpay Users 0.8 million 1.9 million 228%
Ending Afterpay Merchants 6,000 16,400 173%
Afterpay Merchant Fees $22.9 million $93.0 million 306%
Touchcorp Revenue (Ex-AFY) $25.6 million $25.6 million 0%
Total Afterpay Touch Revenue $48.5 million $117.0 million 141%
Note: Australian fiscal years end 30 June (e.g. FY18 ends 30 June 2018).
Source: Company filings and Lakehouse calculations and estimates. Note: We’re human and could be wrong.
Valuation
It’s Complicated
• Not conventionally cheap
• Did not post statutory profit last year
• No ready public comps as fairly unique model
• EV/Rev approach is iffy because company is a lender
• Lenders notoriously challenging to value
• Did I mention it was complicated?
Affirm vs. Afterpay Touch
Affirm Afterpay
Founded 2012 2014
Merchants 1,200+ 10,000+
Users Undisclosed >1.3 million
Volume Measure >1 million loans > 8.5 million transactions
Entered Second Country No Yes
Valuation Latest Round: A$2-A$2.6 billion $1.2 billion
Sources: Company filings, The Wall Street Journal, Lakehouse calculations
https://www.wsj.com/articles/startup-affirm-gets-investment-from-gic-and-a-valuation-nearing-2-billion-1513005881
Afterpay Touch: Key Risks
Rapid Growth
• Introduces execution risk
• International forays may eat up capital and/or fail to reach profitable scale
• …but the company has thus far gracefully navigated its rapid growth
Australian recession
• Loss rates would increase if Australian economy struggled
• Typical Afterpay purchase is discretionary and could be put off during tough times
• …but each transaction is assessed in real-time, so the company could quickly tighten standards
Regulatory
• Sector under review by ASIC
• Could force tighter new client checks, affect late fees, require additional layers of regulation or
compliance, or introduce some form of capital requirements
• …but the company’s rapid adoption and market leadership speaks to happy consumers
Other risks exist – see annual report – but these strike us as the most significant.
Afterpay Touch: Conclusion
Significant Growth
• 0 to 1M+ Afterpay users in just 3 years
Strengthening Network Effect
• Increasing spend per user
Multiple Growth Levers
• Room to gain share of growing online category, go into more storefronts, and go
abroad
Attractive Economics
• Low net transaction loss rates and high capital velocity
