Zip Co: Investment spend ramp-up to fuel growth
About the author:
- 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.
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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