Afterpay Touch Group (APT) FY18 results were largely well understood by the market given the business updates leading into the results – so no real surprises in the numbers.

The big news from the results release was the move into the UK market via the acquisition of ClearPay which was accompanied by a capital raising. In our view, the expansion is in line with management’s stated strategy of moving into key global markets to establish a presence.

Again, given the market opportunity, should management execute on their plans, it adds significant earnings upside and diversification away from its Australian base. The launch is 6 months away and we will look to include the numbers in our valuation closer to 1H19 results. Additionally, the launch into the U.S. also appears to be tracking well.

We retain our Buy recommendation on APT, given its strong market positions with retailers (first mover advantage), opportunities to replicate its business model across different verticals (initial signs are encouraging) and move into the U.S. & UK, whilst not without risk, present significant opportunities.

For the U.S. alone, we estimate the segment could contribute more than US$1.0bn in revenue and US$350m in net transaction margin over the long-term. On the downside, increased regulator (ASIC) scrutiny does present some downside risk (ASIC has published an initial draft), however we remain comfortable with the business model and any potential changes.