Zip Co: 3Q21 trading update – US going strong

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
13 April 2021, 5:00 PM
Sectors Covered:
Insurance and Diversified Financials

  • Zip Co (ASX:Z1P) has provided a 3Q21 trading update. Overall it was another strong quarterly performance from Z1P, in our view, highlighted by group revenue (A$114m), merchants (45.3k), and customers (6.4m) all rising 10%-20% on the sequential quarter (+80%-90% on pcp).
  • Quadpay (Z1P’s US business) continues to be the standout performer, while the Australia business result was solid enough, albeit reflecting seasonal trends.
  • We downgrade Z1P FY21F/FY22F EPS by 2%-4% on some minor adjustments to our sales and profit margins forecasts. Our PT is lowered (login to view) on our earnings changes.
  • Z1P continues to trade at a significant EV-to-sales multiple discount to Afterpay Ltd (ASX:APT), and we continue to see upside if Z1P can execute on its strategy of becoming a global payments player.

What happened

Z1P has provided a 3Q21 trading update. Overall it was another strong quarterly performance from Z1P, in our view, highlighted by group revenue (A$114m), merchants (45.3k), and customers (6.4m) all rising 10%-20% on the sequential quarter (+80%-90% on pcp).

Credit quality remains sound, with Z1P’s net bad debts falling to 1.78% from 1.93% at 2Q21. ZIP continues to point to a “healthy” global merchant pipeline overall.

On newer regions, the UK remains in its infancy after launching in late 2020, with Z1P highlighting some initial merchants signings, e.g., Homebase, JD and Fragrance shop.

Z1P has also undertaken a soft launch into Canada, while making some small/additional strategic investments in two BNPL players located in South East Asia and Eastern Europe.

US the standout, ANZ solid enough

In what is seasonally the weakest quarter for Z1P, Quadpay delivered strong sequential growth in revenue (+16%), transactions (+7%) and customers (+19%).

As at March 2021, Quadpay is now annualising an impressive US$2.8bn of transaction volume. Quadpay merchant growth, +55% sequentially (now 13k) was a quarter highlight, while the Quadpay transaction margin remains above 2%.

Z1P’s ANZ result was broadly in-line with our expectations, with transaction volume (A$837m) up 61% on pcp, but down 8% on the sequential quarter reflecting seasonality.

This result mirrors the trends seen in prior years, with ANZ transaction volume falling 8% sequentially in both 3Q20 and 3Q19 respectively.

Changes to forecasts

We downgrade Z1P FY21F/FY22F EPS by 2%-4% on some minor adjustments to our sales and profit margins forecasts. Our PT is lowered (login to view) on our earnings changes.

Investment view

Z1P continues to execute well, delivering strong growth metrics across the board, in our view, with initial traction from the US expansion remaining highly encouraging.

We continue to see longer term upside if Z1P can execute on its ambitions of becoming a global payments player.

Z1P continues to trade at a significant discount to APT (EV-tosales multiple of ~18x vs ~33x), a gap we think should narrow over time if Z1P continues to deliver.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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