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ThinkSmart and AfterPay: the price is wrong

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ThinkSmart is a micro-cap listed on London’s infamous Alternative Investment Market.

Valued at just £59m, the payments company reported Wednesday that it had been a good year for shareholder returns, with dividends paid out amounting to 21 per cent of the share price. Not a bad yield in today’s interest rate environment.

Yet it wasn’t the juicy cash payout that caught our eye, but another line in the RNS:

The Group also notes the trading update issued by Afterpay Ltd on 2 December 2020 where it reported that its UK division, Clearpay, delivered c. $200 million of underlying sales in November 2020, in what was a record month for Afterpay. This represented c10% of Afterpay’s global underlying sales for the month, up from 7% in the 3 months to 30 September 2020.

Which got us wondering, why is this tiny company mentioning Afterpay — the A$28bn Australian payments company?

Well, flick back to its full-year results from September, and you’ll see all of the company’s profits in 2019 were driven by a 10 per cent stake in a similarly named business called ClearPay.

Here’s the relevant wording:

Profit after tax up 513% to £53.0 million (FY19 restated (1): £8.7 million) driven by £53.7 million (2) non-cash fair value gain on independent valuation of the Group’s retained 10% shareholding in Clearpay Finance Ltd (“Clearpay”)

Which got us digging a little more, at which point we ran into what can only be described as a valuation conundrum. And you know how we love those.

First, some background.

The rest of Clearpay is owned by Afterpay which, like Square and Adyen, has been a beneficiary of investor hype around the digital payments space. The company’s valuation stands at a rather mind-boggling 29 times forward revenues, according to S&P Global data, and it’s share price is up a staggering 236 per cent this year.

You might be familiar with Afterpay’s business model. Like Klarna, it offers consumers the chance to purchase an item online, but defer the payment to a set date interest-free. The vendor receives the cash minus a commission straight away, with AfterPay collecting the proceeds later. Only if a consumer misses a payment do the fees begin to rack up.

So where does ThinkSmart come in? Well in August 2018 it sold 90 per cent of Clearpay to Afterpay for around A$19m in stock, payable in two tranches.

As part of the deal, Afterpay has the right to purchase the remaining 10 per cent Clearpay stake in 2023 at a price agreed at the time of sale between the two parties.

If Afterpay doesn’t exercise this option within six months, however, then ThinkSmart has the right to sell the stake to Afterpay. In effect, the UK-based company is guaranteed to sell its minority holding in Clearpay if it wants to.

But the question is at what price? And this is where it all gets a little fuzzy.

ThinkSmart valued its Clearpay stake at £53m, that much is clear from September’s results:

This valuation was performed by an independent third party and then, just to err on the side of caution, the following discounts were applied:

  1. A 20 per cent discount to reflect the fact that Thinksmart’s holding is minority one and, as a private company with no traded stock, Clearpay is difficult to value.

  2. A further 35 per cent discount to reflect the fact that 3.5 percentage points of its 10 per cent stake is owed to Clearpay employees under a set compensation plan.

After reversing these discounts, FT Alphaville arrived at a valuation of £103m for 10 per cent of Clearpay, or circa £1bn (A$1.9bn) for the entire business.

Here’s the weird thing though: AfterPay has not accounted for its obligation to purchase of Clearpay at anywhere near this price.

Flick through the Australian company’s 2019 annual report to Note 14 (page 114), and you’ll see it’s valued its agreement to purchase Clearpay at just A$3m:

So that’s a gap of around £101m between the two businesses’ respective valuations for the same 10 per cent chunk of Clearpay.

The gap is so large in fact, that ThinkSmart even noted it in its full year accounts:

The Directors note that, as at 30 June 2020, Afterpay have included the Group’s put option as a separate financial liability in their accounts at AU$3m.

So what’s going on here?

Both companies’ 2019 accounts closed on the same date, so a difference in timing doesn’t explain it.

One reason might be that the various inputs into the valuation are different. Afterpay chose to value the liability with a discounted cash flow model based on management forecasts, minus the cost it would take to sell the asset if it chose to (aka “fair value less costs of disposal”).

ThinkSmart, meanwhile, used an independent valuation process, which it states is based on the same principles that will set the value of the asset if the transaction happens.

Two different methodologies shouldn’t spit out such a gap, however.

So we asked Afterpay what explains its divergent view from ThinkSmart on Clearpay’s valuation, and it said:

Afterpay’s valuation of Clearpay has been performed by an independent third-party valuation specialist consistent with prior reporting periods. The valuation has been determined based on a fair value less costs of disposal calculation using cash flow projections, consistent with the requirements of the accounting standards (AASB 13 Fair value measurement). The valuation is then derived by discounting the cash flow projections back to present value using a discount rate. 

ThinkSmart declined to comment.

So if neither party can agree, which company’s valuation of the Clearpay stake is more realistic?

In Afterpay’s 2019 annual report, the company disclosed Clearpay made A$26m of revenues in its first full year of operation, up from A$145k the year before.

At ThinkSmart’s valuation of A$1.9bn, the price would be 73 times trailing sales. For a business that increased revenues 180 times in its first full year of operation, that doesn’t seem particularly egregious.

Nor does it seem mad when you look at the other data. Towards the end of June, Afterpay also boasted that Clearpay is “one of the fastest growing ecommerce payment companies in the European market” with 1m active shoppers, which is a tenth of its total active customers. A press release from last week also showed that the UK made up around 10 per cent of Afterpay’s monthly underlying sales.

So if Afterpay is valued at A$28bn, under a tenth of that feels about right for Clearpay’s market value.

But why does it matter? Well, ThinkSmart is valued today at just £62m. Its 10 per cent stake in Clearpay alone is, according to who you ask at least, worth more than that.

For an investor willing to deal with the illiquid volatility of London’s notorious micro-cap market, that’s a valuation discount that should eventually close if markets are behaving.

Which this year, for some reason, doesn’t quite seem to be the case.



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Andrew Yang; Facebook; WallStreet Bets and much more . . . 



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A carbon registry leaves polluters with nowhere left to hide

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The writer is the founder and executive chair of the Carbon Tracker Initiative, a think-tank

No one yet knows which countries will extract the last barrel of oil, therm of gas or seam of coal. But the jostling has started. Every nation has reasons to believe it has the “right” to continue fossil fuel extraction, leaving others to deal with the climate crisis.

In the Middle East, oil producers can argue that the cost of extraction is low. In Canada, they market their human rights record. Norwegians trumpet the low-carbon intensity of their operations. And in the US under Donald Trump, they touted the virtues of “freedom gas” and called exports of liquefied natural gas “molecules of freedom”.

The dilemma for governments is that if one country stops producing fossil fuels domestically, others will step in to take market share. And so the obligation to contain emissions set out in the Paris Agreement risks being undermined by special pleading.

In the UK, the furore over plans for a new coal mine in Cumbria the year that the country is hosting the UN’s climate summit is indicative of the contrary positions many countries hold. Facing one way the government says it is addressing climate change. But looking the other, it consents not just to continued extraction, but to support and subsidise the expansion of production.

Climate Capital

Where climate change meets business, markets and politics. Explore the FT’s coverage here 

To keep warming under the Paris Agreement limit of 1.5C, countries need to decrease production of oil, gas and coal by 6 per cent a year for the next decade. Worryingly, they are instead planning increases of 2 per cent annually, the UN says. On this course, by 2030 production will be too high to keep temperature rises below 1.5C. The climate maths just doesn’t work.

One of the problems in attempting to track fossil-fuel production is the lack of transparency by both governments and corporations over how much CO2 is embedded in reserves likely to be developed. This makes it difficult to determine how to use the last of the world’s “carbon budget” before temperature thresholds such as 1.5C are exceeded.

Governments need a tool that establishes the extent to which business as usual overshoots their “allowance” of carbon. There needs to be a corrective because the cost competitiveness of renewable energy, and the risk of stranded energy assets, has not stopped governments heavily subsidising fossil fuels. During the pandemic, stimulus dollars have been dumped into the fossil-fuel sector regardless of its steady financial decline, staggering mounds of debt and falling job count. 

This is why my initiative and Global Energy Monitor, a non-profit group, are developing a global registry of fossil fuels, a publicly available database of all reserves in the ground and in production. This will allow governments, investors, researchers and civil society organisations, including the public, to assess the amount of embedded CO2 in coal, oil and gas projects globally. It will be a standalone tool and can provide a model for a potential UN-hosted registry.

With it, producer nations will have nowhere left to hide. It will help counter the absence of mechanisms in the UN’s climate change convention to restrain national beggar-thy-neighbour expansion of fossil-fuel production.

No country, community or company can go it alone. But governments can draw from the lessons of nuclear non-proliferation. First, they must stop adding to the problem; exploration and expansion into new reserves must end. This must be accompanied by “global disarmament” — using up stockpiles and ceasing production. Finally, access to renewable energy and low-carbon solutions must be developed in comprehensive and equitable transition plans.

The choice is between phasing out fossil fuels and fast-tracking low-carbon solutions, or locking-in economic, health and climate catastrophe. A fossil-fuel registry will help governments and international organisations plan for the low-carbon world ahead.

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Hasty, imperfect ESG is not the path for business

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The writer is a global economist. Her book ‘How Boards Work’ will be published in May

Good environmental, social and governance practices take a company from financial shareholder maximisation to multiple stakeholder optimisation: society, community, employees. But if done poorly, not only does ESG miss its sustainability goals, it can make things worse and let down the very stakeholders it should help.

To be sure, the ESG agenda should be pursued with determination. But there are a number of reasons why it threatens to create bad outcomes. The agenda is putting companies on the defensive. From boardrooms, I have seen organisations worry about meeting the demands of environmental and social justice activists, leading to risk aversion in allocating capital. Yet innovation is the most important tool to address many of the challenges of climate change, inequality and social discord.

Pursued by $45tn of investments, using the broadest classification, ESG is weighed down by inconsistent, blurry metrics. Investors and lobbyists use different evaluation standards and goals, which focus on varied issues such as CO2 emissions and diversity. Metrics also depend on business models.

Without a clear, unified compass, companies that measure themselves against today’s standards risk seeming off base once a more consistent regulator-led direction emerges (for example, from worker audits, the COP26 summit and the Paris Club lender nations).

ESG is not without cost and the best hope for long-term success lies with business leaders’ ability to stay attuned to its impact and unintended consequences. For example, while the case for diversity is incontrovertible, efforts at inclusion should account for the possible casualties of positive discrimination.

Furthermore, despite ESG advocates setting a strong and singular direction for governance, organisations have to maintain their operations and value while managing assets and people in a world where cultural and ethical values are far from universal. While laudable, a heightened focus on ethics (such as human rights, environmental concerns, gender and racial parity, data privacy and worker advocacy) places additional stress on global companies.

It is often asked if advocates appreciate that ESG is largely viewed from the west’s narrow and wealthy economic perspective. To be truly sustainable, ESG demands global solutions to global problems. Proposals need to be scalable, exportable and palatable to emerging countries like India and China, or no effort will truly move the needle.

Much of the agenda is too rigid, requires aggressive timelines and lacks the spirit of innovation to achieve long-term societal progress. Stakeholders’ interests differ, so ESG solutions must be nuanced, balanced and trade off speed of implementation against the breadth and depth of change.

Business leaders are aware of the need for greater focus and prioritisation of ESG. We also understand that deadlines can provide important levers for senior managers to spur their organisations into action. After all, in the face of pressure for a solution to the global pandemic, vaccines were produced in months instead of the usual 10 years.

I live at the crossroads of these tensions every day. Raised in Africa, I have lived in energy poverty, and seen how it continues to impede living standards globally. As a board member of a global energy company, I have seen much investment in the energy transition. Yet from my role with a university endowment, I have also been under pressure to divest from energy corporations. 

Business leaders must solve ESG concerns in ways that do not set corporations on a path to failure in the long term. They must have the boldness to adopt a flexible, measured and experimental agenda for lasting change. In this sense, they must push back against the politically led narrative that wants imperfect ESG changes at any cost.



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