Zip Co: 1Q22 quarterly update

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
19 October 2021, 9:00 AM
Sectors Covered:
Insurance, Diversified Financials

  • Zip Co (ASX:Z1P) has released its 1Q22 trading update to the market.
  • We saw 1Q22 group sequential revenue growth of 8% as a reasonable outcome (in Z1P’s seasonally weakest quarter) and highlighting continued momentum. However with the FY22 consensus revenue forecast ($689m) implying +71% growth on pcp, Zip’s sales growth trajectory needs to improve meaningfully over Q2-Q4 to hit this level.
  • We downgrade our Z1P FY22F/FY23F EPS by 4% and >10%. Our PT falls to (login to view).
  • We continue to see longer term upside if Z1P can continue to execute on its ambitions of becoming a global payments player.

Quarterly update

Zip Co (ASX:Z1P) has released its 1Q22 trading update to the market. At the group level, 1Q22 revenue was up 89% on pcp and 8% on the sequential quarter, while merchants (55.2k) and customers (8m) rose 8%-10% on 4Q21 (+60%-80% on pcp).

By division, we note; US) – revenue (A$67m) and transaction volumes (US$702m) both grew 4%-6% sequentially, with customers (5m) and merchants (17.1k) growing 10%-14% sequentially; ANZ) - saw 5% sequential revenue (A$65m) growth, with 4%-7% sequential customer (2.9m) and merchant (37.9k) growth; and; 3) UK) – it remains early, but Z1P is doing A$1.2m of quarterly revenue (+20% sequential growth), with customers and merchants being +~35%- 80% on the 4Q21 level.

Other points of note: 1) management talked to a strong start to Q2, Z1P’s seasonally strongest quarter, led by rising in-store payments (CV-19 re-opening); 2) the latest Z1P Master Trust was oversubscribed and upsized to A$650m with senior notes getting a AAA rating; 3) the Z1P global rebrand is now complete; and 4) as previously announced Z1P’s instalment payment technology has been integrated in the shopping experience within the Microsoft Edge browser.

Analysis

We saw 1Q22 group sequential revenue growth of 8% as a reasonable outcome (in Z1P’s seasonally weakest quarter) and highlighting continued momentum.

However, with the FY22 consensus revenue forecast ($689m) implying +71% growth on pcp, Zip’s sales growth trajectory needs to improve meaningfully over Q2-Q4 to hit this level.

Our other key quarterly takeaways were; 1) while Z1P’s ANZ net bad debt ratio of 2.43% was largely in-line with pcp, it has risen from 1.87% at 4Q21; 2) revenue margins in the US were called out as still being around 7%; and 3) transaction value per average customer continues to decline in Australia (A$90), being roughly half of the pcp level, reflecting the impacts of Tap and Zip functionality.

Forecast and valuation update

We downgrade our Z1P FY22F/FY23F EPS by ~5% and >10%. Changes to our numbers reflect lower sales growth forecasts and some more conservative margin assumptions in future years. Our PT falls to (login to view).

Investment view

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 ~25x), we maintain our ADD recommendation.

Risks

Risk to our ADD call are: 1) any slowdown in sales momentum; 2) competition affecting margins; 3) an inability to execute on the overseas expansion; 4) bad debt risks; 5) higher funding costs; and 6) regulatory change.

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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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