20 December 2020
ML picks TSL as his short for the year. I am long and so I investigate in detail to double check my numbers:
1. At the close on Friday of 72p it’s a £76m market cap.
2. At 30 June they had net cash of £8.8m but since then have paid A$ 6.1 cents per share (about £3.6m) out as a dividend/capital return.
3. £1.45m has been collected post period end from Carphone Warehouse as settlement on a legal dispute and the remaining businesses generated about £1.5m of cash. So forecast net cash at 30 June 2021 should be about £8.15m. (£8.8m – £3.6m + 1.45m + 1.5m). The value of the remaining businesses is unclear.
4. The 10% stake in Clearpay is valued at £53.7m at 30 June. The original 90% stake was sold to Afterpay (an Australian listed payments company: ASX:APT) in August 2018 for AUD 18.55m, settled in shares of Afterpay. At the time the share price was A$18.55, it’s A$111.29 now.
5. Of the 10% stake retained up to 3.5% (it seems safe to assume exactly 3.5%) is in an ESOP for employees of TSL. There is a put/call arrangement over the 10% Clearpay stake so it will go in either Aug 2023 (Afterpay call) or Feb 2024 (TSL put). The formula is not disclosed but it’s linked to the value of Afterpay’s market cap which is attributable to Clearpay.
Afterpay’s market cap is AUD 31.71bn (£18bn) and based on customer numbers Clearpay is 10% of that, hence a rough valuation would be 6.5% of 10% of £18bn = £117m. Note the similarity of the TSL share price chart to that of Afterpay’s, which has increased 12-fold since the low in March.
But what about tax? Assuming that it’s properly structured then the substantial shareholding exemption should apply (10% stake) and so it should be tax exempt. [This is confirmed in note 8 of the finals.]
NB: The Afterpay share price on 30 June was about AUD 60.99 so taking the above £117m and multiplying by 60.99 / 111.29 = £64.1m, 19.3% above the value in the accounts.
6. The director valuation at 30 June 2020 notes:
“The valuation of the Group’s retained holding in Clearpay Finance Limited (“Clearpay”), following the sale of 90% of Clearpay to ASX listed Afterpay Ltd (formerly Afterpay Touch Group Ltd)(“Afterpay”) on 23 August 2018, is based on the agreed valuation principles for the purpose of the Afterpay call option to purchase and the Group’s put option to sell the Group’s holding in Clearpay to Afterpay at any time after 23 August 2023 and 23 February 2024 respectively. The key judgements that are critical to the valuation are the interpretation of the agreed valuation principles, market valuation of Afterpay Ltd in GBP equivalent, and the relevant proportion of this that relates to Clearpay, and the discount to be applied for minority holding and lack of marketability of Clearpay as a standalone entity. In order to support these judgements, management have appointed independent valuation experts to advise on this matter. The independent valuation process, in accordance with the agreed valuation principles, uses the same valuation metrics, multiples and methodologies, including those used by market participants and with regard to sell-side analysts, to value the Clearpay business within the Afterpay listed group. 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.”
From this I infer a valuation formula of:
Afterpay market cap x proportion of Afterpay that Clearpay represents x ( 1 – discount ) where “discount” reflects illiquidity and that it’s a minority stake. This is inline with IPEV valuation guidelines.
7. The detail of the valuation is in note 11(ii), the final number is £53.733m. A 20% discount has been applied for illiquidity and minority holding. The commentary suggests that the 100% value is £67m and 80% is £53.7m. But this is of the 6.5% that attributes to TSL and excludes the 3.5% that attributes to the ESOP.
8. So c. £125m of assets vs current market cap of £76m, the share price should be 118p, 64% higher!