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Unravelling ThinkSmart’s share price decline

Shareholders in an Aim-traded finance company have been hit by a sell-off in Twitter founder Jack Dorsey’s New York Stock Exchange-listed fintech fund, but is it worth holding on?
Unravelling ThinkSmart’s share price decline
  • Stock price of New York Stock Exchange-listed Block falls heavily
  • Shares in Aim-traded ThinkSmart hit by sell-off
  • ThinkSmart trading at 30 per cent discount to spot sum-of-the-parts valuations

A sharp fall in the stock price of New York Stock Exchange-listed Block (SQ:NSQ), a US$66bn market capitalisation fintech fund led by Twitter founder Jack Dorsey, has led to a similar sell-off in Aim-traded finance company ThinkSmart (TSL: 47p).

Block is in the process of acquiring Australian Stock Exchange-listed technology group Afterpay (AFT:APT) in an all-share takeover (currently worth US$15.5bn) which is expected to complete in the current quarter. Afterpay shareholders have already sanctioned the deal.

This is relevant to ThinkSmart shareholders as the UK company agreed terms in late December to sell its 10 per cent holding in Clearpay, a UK payment platform that enables consumers to split the cost of retail purchases into interest-free payments, to Afterpay in exchange for 1.65m shares in the Australian listed-group. This holding will in turn be exchanged for 618,750 Block shares assuming Block’s acquisition of Afterpay completes.

But with Block’s stock price almost halving in value to US$143 since late October, then ThinkSmart’s proposed holding of Block shares is now only worth US$88.5m (£65.5m), or 61.5p per ThinkSmart share. The UK company had valued its stake in Clearpay at £125m in its interim accounts on 30 June 2021, so this represents a material decline. In the intervening period, shares in Afterpay have fallen almost 40 per cent, too. ThinkSmart owns other assets and cash worth £6.5m, so the company has a proforma sum-of-the-parts valuation of £72m (67.5p).

The proposed disposal of ThinkSmart’s shareholding in Clearpay to Afterpay will be put to a vote of ThinkSmart shareholders at a meeting on Friday, 14 January 2022 and is unanimously supported by the directors who hold 41 per cent of the shares. It seems highly likely to be approved by shareholders. But if ThinkSmart does not obtain approval for the disposal before 17 January 2022 then the existing put/call arrangement (exercisable in 2023-24) between Afterpay and ThinkSmart over the UK company’s 10 per cent minority stake in Clearpay will remain in force.

Bearing this in mind chairman Ned Montarello points out “that of the 280 analysts covering Square/Block all of them have a target price of between US$200 to US$250. That is the look through that we as a board have taken. It is about the volume of shares [ThinkSmart shareholders are receiving] at this point not the value of them. We are excited by the prospect of the Block holding as they emerge as one of the winners in this Payment gateway space with the Afterpay buy now pay later product and their Cash App as core to their growth strategy.”

Montarello adds that “Thinksmart shareholders are now more diversified with their Block holding both in product and in geography.” The directors will look to return value to shareholders once a form of return of value has been determined, but given the current gap between Block’s current stock price (US$143) and the fair valuations of analysts (US$200 to US$250) then this is hardly the time for the company to exit Block.

Moreover, with ThinkSmart shares trading 30 per cent below spot sum-of-the-parts valuations, then the risk premium embedded in the UK company’s share price is at elevated levels. When the technology sector sell-off in US markets abates – it has been prompted by minutes from the Fed’s latest meeting that revealed the US central bank believes it’s time to accelerate the withdrawal of quantitative easing – then expect Block’s stock price to recover and ThinkSmart's share price discount to sum-of-the-part valuations to narrow. Furthermore, the 'margin of safety' embedded in ThinkSmart's current valuation makes this a buying opportunity.