Zip Co: Equity placement to accelerate growth
About the author:
- 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.
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:
- A$85m for US growth (accelerating QuadPay and merchant partnerships);
to scale the UK operation (with the aim to secure enterprise merchants and fund
receivables until a local funding facility is set up);
- 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;
- A$12m for ANZ product expansion (e.g. supporting ZipBiz).
Things to keep an eye on
- 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);
- 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);
- 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.
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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