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Heading for a profitable exit

Shareholders in a financial services group could be heading for a bumper payday early next year.
Heading for a profitable exit
  • Square’s takeover of Afterpay to complete on 18 January 2022
  • Afterpay can exercise its call option early to buy out ThinkSmart’s 10 per cent holding in Clearpay
  • ThinkSmart to return A$5.6m to shareholders in December

The key take for me from Aim-traded finance company ThinkSmart’s (TSL: 105p) annual meeting today is chairman’s Ned Montarello’s commentary on the takeover of Australian Stock Exchange-listed technology group Afterpay (APT:ASX – A$117) by New York Stock Exchange-listed Square Inc (NYSE:SQ.), a US$106bn fintech group led by Twitter founder Jack Dorsey. At current market prices, the all-share offer values Afterpay at A$34bn (£19bn).

The takeover is expected to conclude on 18 January 2021 at which point Afterpay has the right (on change of control) to exercise its call option early to purchase ThinkSmart’s 10 per stake in Clearpay, a fast-growing UK payment platform that enables consumers to split the cost of retail purchases into interest-free payments. The 10 per cent stake is also subject to a call/put arrangement between the two parties exercisable in 2023-24. The valuation methodology is based on key financial metrics as well as the market capitalisation of Afterpay.

Frankly, it would be irrational for Afterpay not to exercise the call option early as the cost of buying out ThinkSmart can only rise in future given that Clearpay’s growth is likely to accelerate as part of the Square and Afterpay combined business. Importantly, any buy-out of ThinkSmart’s stake will now have to be made in cash.

Bearing this in mind, the 10 per cent stake in Clearpay is held on the Aim minnow’s balance sheet at £125m (117p a share) after applying 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. Thinksmart’s valuation is more than justified given that in the 2020/21 financial year Clearpay accounted for 35 per cent of Afterpay’s cash profit, 13 per cent of its active customer base and 8.5 per cent of its underlying sales.

Afterpay has not updated the market on its first quarter trading to 30 September 2021, but Clearpay’s financial contribution is likely to be proportionately even higher, and rising. However, even if you ignore that possibility, then ThinkSmart’s fully diluted stake in Clearpay is still worth £151m (142p share) after adding back the 17.5 per cent liquidity discount applied in the June valuation.

I also note that the wind down of ThinkSmart’s legacy finance leasing business continues to generate cash, so much so that the board is returning A$5.6m (about 2.85p a share) of its A$13m (6.5p a share) cash pile to shareholders next month. The company has £2.5m (2.4p a share) of receivables on its balance sheet, too, and they are low-risk as customer defaults are neglible.

Effectively, ThinkSmart’s sum-of-the-parts valuation is 151p a share with the valuation risk weighted to the upside. More importantly, Afterpay’s imminent change of control could lead to a major liquidity event to turn ThinkSmart’s valuable holding in Clearpay into cash.

I last advised buying the shares, at 103p, when I covered ThinkSmart’s annual results (Targeting undervalued technology stocks’, 14 September 2021), and the holding has so far produced a 666 per cent total return since I initiated coverage, at 14p, in my April 2020 Alpha ReportStrong buy.

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