Zip Co: AGM and capital raising

About the author:

Author name:

By Richard Coles

Job title:

Senior Analyst

Date posted:

03 December 2019, 12:38 PM

Sectors Covered:

Insurance, Diversified Financials

• Zip Co (ASX:Z1P) has announced a A$60m capital raising in conjunction with its AGM.
• Z1P continues to make good progress on its growth agenda with AGM commentary pointing to full launches for both Zip Biz and the UK business in 3Q20.
• While we are supportive of Z1P’s growth plans, the current capital raising does add to significant dilution throughout CY19 which needs to be justified by execution.
• We make small changes to our absolute FY20/FY21 NPAT forecasts (-A$1-2m, off a low base), with EPS dilution from the capital raising -3% pa. Our Z1P price target falls (Morgans can login to view detailed reports and price targets here).
• We are fans of the Z1P story, but with the stock having re-rated strongly this year (>250%), we feel its current valuation is fair pending evidence of traction in its offshore growth strategy. We maintain our Hold recommendation.

What happened

Z1P has announced a A$60m capital raising in conjunction with its AGM.

The raising involved a A$50m non-underwritten placement to institutional investors and a A$10m SPP.

Money will be used to fund growth (global expansion, new product verticals), increase investment in products and technology and to strengthen Z1P’s balance sheet.

As part of the AGM, FY20 financial targets were largely reaffirmed, e.g. 2.5m customers and A$2.2bn in annualised transaction volume by June 2020.

Good progress on ZipBiz and Partpay

Positively, ZIP appears to be progressing its growth agenda quickly. Indeed, AGM commentary noted ZipBiz is moving towards full rollout by 3Q20, with Z1P’s UK launch on track for the same time frame.

Additionally, the rebranding of Partpay to Z1P in NZ is now complete.

The other AGM commentary to catch our attention was the disclosure of customer cohort benefits being driven by Z1P’s Native App.

Management highlighted Native App users transact 3.4x more on average than non-app users, and have a much lower arrears rate (0.73% vs 1.03% for non-app users).

Significant capital issued in 2019

While acknowledging Z1P has a significant growth agenda, it is worth remembering there is a large dilution impact inherit in funding it.

On Morgans Estimates, this calendar year Z1P has issued 93 million shares/warrants, almost one-third of its December 2018 diluted share count (302 million) to support a range of growth activities including the Partpay acquisition and the Amazon Australia strategic agreement.

While we believe Z1P’s performance warrants such accelerated investment, it does need to be justified by further solid execution.

Changes to forecasts and investment view

We make small changes to our absolute FY20/FY21 NPAT forecasts (-A$1-2m, off a low base), with EPS dilution from the capital raising -3% p.a.

As a result, our Z1P price target falls (Morgans can login to view detailed reports and price targets here).

We are fans of the Z1P story, but with the stock having re-rated strongly this year (>250%), we feel its current valuation is fair pending evidence of traction in its offshore growth strategy.

We maintain our Hold recommendation.

More information

Morgans clients can login to view our detailed report and share price target for Zip Co (Z1P). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

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