Zip Co: US traction encouraging

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
25 February 2021, 6:00 PM
Sectors Covered:
Insurance and Diversified Financials

  • Zip Co's (ASX:Z1P) reported 1H21 NPAT loss of ~A$453m was impacted by a number of one-off items, e.g. a net revaluation of Quadpay (-A$306m) and performance shares issued due to hurdles being met (~-A$64m). However, even excluding these items, the underlying loss was closer to ~A$114m, well above our estimates on higher expenses (-A$30m).
  • While Z1P’s investment to drive growth is higher than we expected, we think momentum across the business remains very strong, particularly the traction the company is gaining in the US.
  • We lower FY21F/FY22F EPS by >50% on current year one-offs and allowing for higher investment in all forecast years. We change our valuation from a DCF to a blended DCF/Price-to-sales (PS) methodology, our PT has changed (login to view). Z1P continues to trade at a significant PS discount to APT, and we continue to see upside if it can execute on its strategy of becoming a global payments player.

Result summary

Z1P’s 1H21 NPAT loss of ~A$453m was impacted by a number of one-off items, e.g. a net revaluation of Quadpay (-A$306m) and performance shares due to hurdles being met (~-A$64m).

However, even excluding these items, the underlying loss was closer to ~A$100m, well above our estimates on higher expenses (-A$30m).

Revenue of A$160m (+131%) was broadly in-line with our estimates driven by solid yoy TTV growth of 141% to ~A$2.3bn. Net bad debts were well contained at 1.93%, down on 2.24% in the pcp.

The good

  1. Australia remains cash EBTDA positive with the group now Cash EBTDA breakeven.
  2. Z1P has launched in the UK with a number of marquee brands and pointed to a strong pipeline.
  3. Quadpay’s 1H21 growth was rapid with TTV (A$973m) and customers (3.2m) both up >200% on pcp
  4. Quadpay’s net transaction margin remains above 2% and this business has improved group capital efficiency, highlighted by an improving repayment velocity and also revenue yield (25% in Dec vs ~16% in June 2020).
  5. Z1P is now Australia’s most downloaded BNPL App (Dec20/Jan21) while all key growth metrics, e.g. revenue, and customers etc, grew ~40%-60% for the half.
  6. Average funding costs reduced from 4.7% to 3.9% due to a lower average rate across the AU portfolio.

Things to keep an eye on

  1. Marketing costs rose over 4 times (~A$26m vs 6m in pcp) with the inclusion of Quadpay, product launches (e.g. Tap and Zip) and increased overall brand activity.
  2. Z1P continues to be in a high growth phase (and will likely be for some time), which could compress leverage in its cash EBITDA performance near term (1H21 A$0.2m).
  3. While it's positive that the first tranche of Quadpay performance hurdles have been met, obviously achievement of these milestones has attached dilution.

Changes to forecasts and investment

We lower FY21F/FY22F EPS by >50% on current year one-offs and allowing for higher investment in all forecast years.

We change our valuation from a DCF to a blended DCF/Price-to-sales (PS) methodology, with a revised PT (login to view).

Z1P continues to trade at a significant PS discount to APT (21x vs 35x), and we continue to see upside if it can execute on its strategy of becoming a global payments player.

Find out more

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