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Targeting undervalued technology stocks

A company that holds a valuable stake in a buy-now-pay-later firm is trading on a material discount to sum-of-the-parts valuations even though it’s probable that a large US fintech group will attempt to buy it out
Targeting undervalued technology stocks
  • 10 per cent stake in Clearpay revalued to £125m (£106.6m at 31 December 2020 and £53.7m at 30 June 2020)
  • Net profit of £71.7m in 12 months to 30 June 2021
  • Net asset value doubled to £134.5m (126.2p a share)
  • Takeover of Afterpay post period end by Square Inc

Annual results from Aim-traded finance company ThinkSmart (TSL:103p) highlight the hidden value held in its 10 per cent stake in Clearpay, a fast-growing UK payment platform that enables consumers to split the cost of retail purchases into interest-free payments. The other 90 per cent of Clearpay is owned by Afterpay Touch (APT:ASX – A$122), a A$36bn (£19bn) market capitalisation Australian Stock Exchange-listed technology group that has recommended a US$29bn (A$39bn) all-share takeover from New York Stock Exchange-listed Square Inc (NYSE:SQ.), a US$113bn fintech group.

The 10 per cent stake is subject to a call/put arrangement between the two parties exercisable in 2023-24. One of the agreed principles in determining the valuation of the stake is the market capitalisation of Afterpay. This has increased markedly in the past 12 months. Other agreed principles include Clearpay’s customer base and contribution to Afterpay’s revenue and profits. On all counts Clearpay is making significant progress.

In the 12 months to 30 June 2021, Clearpay’s underlying sales more than trebled to A$1.8bn (8.5 per cent of Afterpay’s global sales), its customer base doubled to 2.1m (13 per cent share) and its cash profit contribution of A$13.6m equated to more than a third of Afterpay’s total profits. Clearpay added more than 5,000 merchants in the financial year alone.

ThinkSmart has effectively valued the 10 per cent stake at £233m (two-thirds of the narrow range from independent valuers) and then applied a 17.5 per cent liquidity discount and a 35 per cent further discount to take account of shares subject to an employee share option plan. It then arrives at a £125m (117p a share) valuation. However, in the event of a change of control (which is expected in the first quarter of the 2022 calendar year), Square will have the right to exercise Afterpay’s call option early to buy out ThinkSmart’s stake in Clearpay for cash. I fully expect this to happen as the price can only rise in the future. That’s because Clearpay’s share of Afterpay’s overall business is becoming larger and larger by the day, and the fast-growing buy-now-pay-later market is still only in its early stages of growth, penetrating 2 per cent of a US$10tn global market.

In this scenario, ThinkSmart’s shareholders could easily achieve a take-out price of 155p a share for the Clearpay stake after adding back the 17.5 per cent liquidity discount and after factoring in that Square’s bid currently values Afterpay’s equity at a 7 per cent premium to the read-through input price used in ThinkSmart’s latest valuation of its stake in Clearpay. To that sum you can add ThinkSmart’s net cash of £7m and other net assets of £2.5m to arrive at a mark-to-market sum-of-the-parts valuation of 164p a share for ThinkSmart’s own shares. On this basis, the share price discount is 37 per cent and can only narrow as more investors cotton onto the real possibility that Square will attempt to buy out ThinkSmart’s 10 per cent interest in Clearpay for cash once it has completed the Afterpay takeover.

I last advised buying the shares, at 88p, when the Afterpay takeover was announced (‘ThinkSmart strong buying opportunity: Squaring the circle’, 2 August 2021), and the holding has now produced a 638 per cent total return since I initiated coverage, at 14p, in my April 2020 Alpha Report. Strong buy.


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