Zip Co: Investment spend ramp-up to fuel growth

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
26 August 2021, 8:30 AM
Sectors Covered:
Insurance, Diversified Financials

  • Z1P reported a FY21 NPAT loss of ~A$653m, impacted by a number of one-off non-cash items (e.g. a -A$306m net adjustment related to Quadpay and higher share-based payments expense related to performance hurdles being met).
  • Z1P’s investment spend to drive growth was elevated in FY21 (e.g. marketing expense of A$71m, up ~6x on FY20), however, we believe the underlying business momentum remains strong and warrants the acceleration in spend, particularly in the U.S.
  • We lower our Z1P FY22F EPS by ~12% on higher costs but lift our FY23F EPS >10% (off a low base) on the benefits of higher growth. Our PT is set at (login to view) reflecting higher long-term growth assumptions.
  • We continue to see longer term upside if Z1P can execute on its ambitions of becoming a global payments player and maintain our ADD recommendation.

Event summary

Z1P reported a FY21 NPAT loss of ~-A$653m, impacted by a number of one-off non-cash items such as a -A$306m net adjustment related to Quadpay and an elevated share-based payments expense due to US business performance hurdles being met.

Revenue was ~A$403m (+150% on pcp) and ahead of consensus/MorgansE (A$398m/A$354m), driven by strong year-on-year TTV growth of 176% (FY21 TTV of A$5.8bn).

What we liked in the result

Australia remains cash EBTDA positive (+A$8.4m) despite elevated investment levels. Z1P’s global business (-A$26.3m cash EBTDA, 46% of group revenue) is expected to be the largest contributor in FY22.

Quadpay’s performance again was the standout with A$2.5bn in sales (+225% on pcp, pro forma basis), reaching 4.4m customers (+144% on pcp, pro forma) and 15.6k merchants. Quadpay also had 5.2m app downloads in FY21 (vs 1.6m in FY20), with US app customers transacting >29x a year (within two years of joining). 

FY22 is showing strong early momentum with management commenting that FY22 year-to-date transaction volumes are up 58% on pcp in Australia and up 240% on pcp in the U.S.

Z1P is showing improved capital efficiency with an improved repayment velocity (shortened loan book duration) as the book skews more towards the US pay-in-4 product and an improved revenue yield (~23% vs 17% in FY20).

Bad debt write-offs (net of recoveries) remained in check at 1.82%, down from 2.24% at FY20 and well below management expectations of 2.5%.

Things we’re keeping an eye on

The group revenue margin of 7% (of TTV) was down from 7.6% in FY20, while Z1P’s cash transaction margin (3.5%) was also down on the FY20 level (3.8%). 

Growth-driven investment spend remains elevated with FY21 marketing expense (A$71m) up over 6x on pcp and employee expenses up 120% on pcp to ~A$98m. Z1P has ~A$462m in cash to fund investments/future growth.

Share-based payments expense (~A$143m) included ~A$103m attached to Quadpay performance hurdles being met which, whilst positive, does imply a dilutionary impact.

Changes to forecasts and investment view

We lower our Z1P FY22F EPS by ~12% on higher costs but lift our FY23 EPS >10% (off a low base) on the benefits of higher growth. Our PT is set at (login to view) reflecting higher long-term growth assumptions.

We continue to see longer term upside if Z1P can execute on its ambitions of becoming a global payments player. Noting the stock continues to trade at a significant discount to peer APT (~6x sales versus 27x), we maintain our ADD recommendation.

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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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