Zip Co: Equity placement to accelerate growth

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
17 December 2020, 4:30 PM
Sectors Covered:
Insurance and Diversified Financials

  • Zip Co (ASX:Z1P) announced it would be raising up to A$150m in new equity (A$120m institutional placement and a A$30m SPP) to help accelerate growth.
  • 90% of new capital will be used to fund offshore growth, with A$85m allocated to capitalise on QuadPay’s recent robust momentum (November TTV/Customers up > 200% on pcp).
  • A ‘New Markets’ division was established, taking small strategic stakes in regions of interest (e.g. UAE, Europe).
  • We lower our FY21F/FY22F NPAT forecasts by ~8%/5% reflecting higher investment spend in the near term. Our DCF-derived price target falls (login to view updated price target) after factoring in the capital raise. We still see relative value in the stock and further upside exists if Z1P can execute offshore. Add maintained.

What happened

Z1P announced it would be raising up to A$120m in new equity (~22.5m shares) via a fully underwritten institutional placement and a non-underwritten A$30m (~5.6m shares) share purchase plan at A$5.34 (~4% discount to previous close of A$5.57).

The bulk of the capital raise (~90%) will be used to fund offshore growth and product expansion (with the ANZ business being cash flow breakeven for 9 consecutive quarters now). Z1P has also recently called out some strategic investments/partnerships, particularly ‘spotii’ in the UAE and ‘Twisto’ in the Czech Republic.

Bulk of raise to fund offshore acceleration

The raise, in our view, makes strategic sense as it is being used to accelerate growth in key offshore regions (US/UK) and gain entry into new markets. The use of capital will be:

  1. A$85m for US growth (accelerating QuadPay and merchant partnerships);
  2. A$15m to scale the UK operation (with the aim to secure enterprise merchants and fund receivables until a local funding facility is set up);
  3. A$35m for new market opportunities, with a new division established to focus on - investing in strategic assets (e.g. UAE’s ‘spotii’ and Czech Republic’s ‘twisto’), greenfield regions and local partnerships and;
  4. A$12m for ANZ product expansion (e.g. supporting ZipBiz).

Things to keep an eye on

  1. QuadPay is gaining momentum in the US with November monthly TTV and customers both up > 200% on pcp while Similarweb compiled data shows website visitors broadly doubled to >3.4m (Sept to Nov);
  2. Z1P appears to be taking strategic stakes in regions of interest with potential upside (e.g. Czech Republic’s ‘Twisto’, which has the ability for passport licensing across the EU);
  3. We acknowledge overall business momentum is strong, but given Z1P’s growth profile, we question if this raise is large enough to take further raisings off the table in the near term (noting Z1P raised A$200m for the QuadPay stake 6 months ago whilst APT raised A$800m in July, arguably giving it a longer runway).

Changes to forecasts and investment view

We lower our FY21F/FY22F NPAT forecasts by ~8%/5% reflecting higher investment spend for growth in the near term. Our DCF-derived price target falls (login to view updated price target) after factoring in the capital raise and changes to our near term earnings assumptions.

Whilst execution risk exists in Z1P’s offshore expansion plans, trading on ~7x 12-month forward EV/Sales (consensus) we currently see relative value in the stock and further upside if Z1P can achieve its goal of becoming a global payments player. Add maintained

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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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