ASX breaks past 6000 despite mixed signals

In its best day since mid-June, the ASX 200 rose 1.7 per cent to a three-week high close of 6033.7 points on Thursday.

Australia’s sharemarket is defying the sceptics with the S&P/ASX 200 index bursting through 6000 points on Thursday, as COVID-19 vaccine progress and stronger-than-expected US manufacturing data offset a delayed economic reopening in New York and California amid a worsening coronavirus pandemic.

In its best day since mid-June, the ASX 200 rose 1.7 per cent to a three-week high close of 6033.7 points as the index accelerated above a bullish pennant pattern.

Of course vaccine news has both excited and frustrated the market in recent months and there is an extremely wide range of expectations for US non-farm payrolls data before the US long weekend.

Market darling Afterpay, which topped gains last quarter with a 232 per cent rise as global markets roared back to life and Tencent took a 5 per cent in the buy now, pay later company, surged 9.5 per cent to a record close of $68.16.

Afterpay was the third-biggest contributor to the rise in Australian shares after CSL and CBA.

With a current market cap of $18.3bn, Afterpay is now worth billions of dollars more than such long-established companies as Aristocrat, ASX Ltd and Brambles, an amazing circumstance for a company that’s yet to make a profit and with a business model that’s potentially susceptible to regulatory change, to say nothing of a potential fiscal cliff later this year.

It came as Citi’s Siraj Ahmed upgraded his 12-month price target by an extraordinary 137 per cent to $64.25. Such big price target changes by major brokers on major companies are rare.

Mr Siraj cited a 70 per cent rise in his earnings forecast for Afterpay’s earnings two years from now, a 40 per cent rise in the valuation of its peer group, and a “roll-over of our relative valuation to reflect the opportunity from new markets and new avenues of monetisation”.

But he kept his rating at “neutral/high risk” due to his caution about the outlook for consumer discretionary spending and bad debts when fiscal stimulus measures end.

Such a big change in price target might be seen as a sign of “capitulation” by bears which could entice a final wave of buying before a major pullback — as occurred on WiseTech last September when it was hit by a short-seller report.

Indeed, after Thursday’s rally, Afterpay’s share price was 49 per cent above Bloomberg’s consensus 12-month price target of $42.59 — a record positive gap.

But more institutional investors could be tempted to buy, and the market isn’t terribly short on Afterpay.

Aggregate short sales as of last Friday were just 1.4 per cent of the company. That compares to 5.9 per cent before Tencent bought its stake in late April and a record high of 9.7 per cent in May 2018.

Indeed the level of shorting seems too low for a stock that has risen 8.5-fold since its late March nadir when the market picked it as a likely victim of a looming financial crisis.

In many ways Afterpay now seems unassailable — from the healthy base of “smart” institutional investors on its register, to availability of capital and new markets afforded by Tencent.

With a net debt to earnings before interest, tax, depreciation and amortisation ratio of four times, Afterpay’s balance sheet may be considered to be very extended for an industrial company. Yet it’s not extended for a financial company.

Thus Afterpay has managed to have its cake and eat it too — it trades like an industrial in terms of valuation, but it has the balance sheet of a financial.

It’s reminiscent of the TMT bubble in the late 1990s, where economic growth was weak with abundant liquidity, which found its way into the technology, media and telecom companies.

Still, while there aren’t any of the “red flags” like accounting irregularities that might attract a short-seller attack, there are risks and the co-founders still hold almost 8 per cent each.