ThinkSmart (LSE: TSL) is a small-cap stock that has caught my eye. In my opinion, this looks like an interesting play that seems undervalued for what it is. If I’m right, this share could make some great returns this year.
What is ThinkSmart?
According to its website, ThinkSmart is a “specialist digital platform business.” In reality, much of the value of the company comes from its 10% stake in Clearpay. As Clearpay is so important for the ThinkSmart share price, it is important to understand what it does.
Clearpay is a payment company that allows customers to break up the cost of their purchases into smaller interest-free payments. The ‘buy now pay later’ payments sector has experienced rapid growth over the last few years, especially in the UK, and Clearpay is at the forefront of this new industry. In fact, the payment platform is being adopted by large retailers including ASOS, M&S and JD Sports. The growth in this sector is so substantial that Clearpay found its revenue up 346% in 2020!
The Clearpay stake
In 2018, ThinkSmart sold 90% of its Clearpay holding to Afterpay Touch, an Australian tech company. ThinkSmart has a further arrangement with Afterpay to sell its remaining 10% stake in the business. The management team at ThinkSmart seem committed to getting the most out of the company’s remaining stake. As well as this, over 40% of the small-cap stock’s shares are held by the management team and the board, something that I find very reassuring.
At the start of August, US technology giant Square announced its plans to acquire Afterpay. This acquisition is expected to be completed in early 2022, and the news sent ThinkSmart shares soaring. As Afterpay will be changing ownership, it can now exercise the aforementioned deal with ThinkSmart to acquire its remaining stake in Clearpay.
How could this affect the share price?
The share price has risen over 17% in the last week (at the time of writing), due to the company announcing its financial results. The company found net income up 35% for the year ending June 2021. This increase can be explained by a change in the valuation of its Clearpay holding. The valuation, which is carried out by a third party, brings the shareholders’ equity of ThinkSmart to just over £134 million. In theory, shareholders equity represents the assets owned by shareholders after all debt has been paid. Therefore, as ThinkSmart’s market cap is only £122 million, I believe we could see the share price move another 10% higher. There is also the chance that the deal is revalued higher before the acquisition.
In reality, however, things rarely work out so smoothly. I worry that because the company’s market cap is so small, the share price will experience a greater amount of volatility. Quite frankly, I would like to see more than a 10% upside to stomach such large moves in the share price. As well as this, after the Afterpay acquisition, ThinkSmart has a very limited future in my eyes. Although I’m strongly considering buying, I won’t be pulling the trigger on this small-cap stock just yet.
Kevin Diamond has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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