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What does the Afterpay / Square acquisition mean for Hyperion investors

Afterpay’s proposed takeover by Square this week marks the steady rise of one of Australia’s most successful exports in recent years and further validates Hyperion’s thesis of investing in leading Structural Growth companies. Hyperion is one of only a few Australian Institutions to truly understand and back Afterpay. Afterpay is Hyperion’s largest current holding (12%) in the Hyperion Australian Growth Companies Fund. Square has also consistently been a top 3 holding over the past 12 months in the Hyperion Global Growth Companies Fund (Managed Fund) with a current weight of 8%.

Hyperion’s conviction in both companies gives them an enviable market leading view on the synergies Afterpay and Square will gain from this takeover.

Background 

The Afterpay Board unanimously recommends that Afterpay shareholders vote in favour of the Scheme of Arrangement with an offer of 0.375 shares of Square common stock for each Afterpay share.

At Square’s current price and current exchange rate, this is ~$126/share. This compares to an APT price of $96.66 prior to trading.

Hyperion Initial Comments

Our thesis that Afterpay is a fundamentally misunderstood, undervalued structural growth stock, was validated today with the proposed transaction with Square, showcasing the exciting promise of both companies. We also believe Square is a misunderstood stock, one that Hyperion understands well and is exactly what Afterpay was aspiring to evolve into over the next 5 years.

Square’s product set is broader and significantly more comprehensive when compared with Afterpay’s. Afterpay is a single product company and developed the buy now pay later (BNPL) model in Australia in 2015 which it has exported successfully to the world. More recently the BNPL industry has also been validated by the entrance of large players such as PayPal and Apple Pay. In contrast, Square through its Cash App (launched in 2013) offers consumer products across P2P transactions, banking, stocks and bitcoin trading, government social security and taxes.

Hyperion was able understand how Afterpay was evolving, benefitting from a global perspective through our ownership in Square. Hyperion also understands the structural changes in shopping and payments occurring in the next generation, through the emergence of Millennials and Gen Z. We estimate that 65% to 70% of those under the age of 30 across Australia, UK and the US do not have a credit card. Further, we estimate over 50 million people do not have a credit rating in the US. This means a large part of the population, particularly Gen Z, are operating out of the traditional financial system. High interest rates and revolving debt traps do not appeal to this generation as a result of having observed their parents suffer during the GFC. Leading P2P and BNPL apps such as Cash App and Afterpay, have become essential in the emerging generations to consume and transact outside the traditional finance system.

Afterpay Money, currently in beta testing, should be accelerated under the ownership of Square. Square has approximately 40 million Cash App monthly active users and over 70million annual active users, which will gain access to Afterpay through Cash App. In contrast, Afterpay has 16 million consumers using its BNPL offering.

We remain convinced the long-term outlook for Afterpay is compelling and its forecast IRR is attractive. While the premium on offer does not excite Hyperion, the structure of the deal to receive Square stock listed on the ASX as a CDI is compelling. In our view this transaction is an upgrade in liquidity, valuation and quality. This means Hyperion’s Australian portfolios will replace Afterpay with Square in 1Q of calendar 2022.

Summary

In summary, we believe this is a huge win for Hyperion investors and again validates the market inefficiencies Hyp

Afterpay’s proposed takeover by Square this week marks the steady rise of one of Australia’s most successful exports in recent years and further validates Hyperion’s thesis of investing in leading Structural Growth companies. Hyperion is one of only a few Australian Institutions to truly understand and back Afterpay. Afterpay is Hyperion’s largest current holding (~11.5%) in the Hyperion Australian Growth Companies Fund. Square has also consistently been a top 3 to 5 holding over the past 12 months in the Hyperion Global Growth Companies Fund (Managed Fund) with a current weight of ~7.5%.

Hyperion’s conviction in both companies gives them an enviable market leading view on the synergies Afterpay and Square will gain from this takeover.

Background 

The Afterpay Board unanimously recommends that Afterpay shareholders vote in favour of the Scheme of Arrangement with an offer of 0.375 shares of Square common stock for each Afterpay share.

At Square’s current price and current exchange rate, this is ~$126/share. This compares to an APT price of $96.66 prior to trading.

Hyperion Initial Comments

Our thesis that Afterpay is a fundamentally misunderstood, undervalued structural growth stock, was validated today with the proposed transaction with Square, showcasing the exciting promise of both companies. We also believe Square is a misunderstood stock, one that Hyperion understands well and is exactly what Afterpay was aspiring to evolve into over the next 5 years.

Square’s product set is broader and significantly more comprehensive when compared with Afterpay’s. Afterpay is a single product company and developed the buy now pay later (BNPL) model in Australia in 2015 which it has exported successfully to the world. More recently the BNPL industry has also been validated by the entrance of large players such as PayPal and Apple Pay. In contrast, Square through its Cash App (launched in 2013) offers consumer products across P2P transactions, banking, stocks and bitcoin trading, government social security and taxes.

Hyperion was able understand how Afterpay was evolving, benefitting from a global perspective through our ownership in Square. Hyperion also understands the structural changes in shopping and payments occurring in the next generation, through the emergence of Millennials and Gen Z. We estimate that 65% to 70% of those under the age of 30 across Australia, UK and the US do not have a credit card. Further, we estimate over 50 million people do not have a credit rating in the US. This means a large part of the population, particularly Gen Z, are operating out of the traditional financial system. High interest rates and revolving debt traps do not appeal to this generation as a result of having observed their parents suffer during the GFC. Leading P2P and BNPL apps such as Cash App and Afterpay, have become essential in the emerging generations to consume and transact outside the traditional finance system.

Afterpay Money, currently in beta testing, should be accelerated under the ownership of Square. Square has approximately 40 million Cash App monthly active users and over 70million annual active users, which will gain access to Afterpay through Cash App. In contrast, Afterpay has 16 million consumers using its BNPL offering.

We remain convinced the long-term outlook for Afterpay is compelling and its forecast IRR is attractive. While the premium on offer does not excite Hyperion, the structure of the deal to receive Square stock listed on the ASX as a CDI is compelling. In our view this transaction is an upgrade in liquidity, valuation and quality. This means Hyperion’s Australian portfolios will replace Afterpay with Square in 1Q of calendar 2022.

Summary

In summary, we believe this is a huge win for Hyperion investors and again validates the market inefficiencies Hyperion continues to exploit as business analysts and long-term holders.

Disclaimer – Hyperion Asset Management Limited (‘Hyperion’) ABN 80 080 135 897, AFSL 238 380 is the investment manager of the Funds. Please read the Product Disclosure Statement (‘PDS’) in its entirety before making an investment decision in the Funds. You can obtain a copy of the latest PDS of the Funds by contacting Hyperion at 1300 497 374 or via email to investorservices@hyperion.com.au.

The fund changed its name from Hyperion Global Growth Companies Fund – Class B to Hyperion Global Growth Companies Fund (Managed Fund) on 5 February 2021 in order to facilitate quotation of the fund on the ASX.

Hyperion and Pinnacle Fund Services Limited believes the information contained in this communication is reliable, however no warranty is given as to its accuracy and persons relying on this information do so at their own risk. Any opinions or forecasts reflect the judgment and assumptions of Hyperion and its representatives on the basis of information at the date of publication and may later change without notice. The information is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. This communication is for general information only. It has been prepared without taking account of any person’s objectives, financial situation or needs. Any person relying on this information should obtain professional advice before doing so. To the extent permitted by law, Hyperion disclaim all liability to any person relying on the information in respect of any loss or damage (including consequential loss or damage) however caused, which may be suffered or arise directly or indirectly in respect of such information contained in this communication.