Zip Co: Another solid quarter

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
14 October 2020, 4:00 PM
Sectors Covered:
Insurance and Diversified Financials

  • Z1P has released its 1Q21 quarterly update to the market.
  • In our view, it was another solid performance by Z1P, highlighted by group revenue (~A$72m), merchants (34.4k) and customers (4.5m) all up ~15%-20% on the sequential quarter.
  • A robust performance from Quadpay (transactions +42% sequentially) was the key positive highlight, while some softer revenue growth in Australia (+3% sequentially) was an area of weakness.
  • We lower our FY21F/FY22F NPAT each by A$10m, off a low base. Changes reflect mainly a reduction in revenue growth assumptions in all years.
  • We continue to think Z1P’s long term growth profile remains attractive, particularly buoyed by its offshore expansion. Add rating maintained (login to view target price).

Summary

Z1P has released its 1Q21 quarterly update to the market. Our main takeaways are:

  1. Z1P’s ANZ business saw revenue (A$46m) and transaction volumes (A$621m) grow 3%- 10% on the sequential quarter and ~50% on pcp (pro forma).
  2. Quadpay (Z1P’s US business) saw 42% sequential transaction volume growth (now A$322m).
  3. Group merchants (34.4k) and customer numbers (4.5m) were up 18%/15% sequentially, while group transaction volume (A$943m) rose 18% sequentially and is now annualising at ~A$3.8bn. 
  4. Net bad debts of 2.43% rose slightly on 4Q20 (2.24%).

The good

The key update positive was the robust performance of Quadpay, in our view. This business delivered strong across the board sequential growth in all key metrics including revenue (~A$23m, +50%), customers (2.2m, +22%) and merchants (6.8k, +51%). The other quarterly positives included:

  1. The relatively stable net bad debt performance, accompanied by an improvement in monthly arrears (0.91% at September end vs 1.33% in June).
  2. Z1P being granted a principal issuer license with Visa, which enables users to create Zip-branded virtual cards in real time.
  3. Management pointing to a strong product and merchant pipeline, and highlighting that 2Q21 (Z1P’s seasonally strongest quarter) had begun solidly in all markets.

Things to keep an eye on

  1. While the ANZ business saw a solid enough quarter with 9%-14% sequential growth in transactions, merchants and customers, revenue growth was somewhat more subdued at 3%.
  2. Z1P remains on track to launch in the UK this half, with merchant, channel and partner pipelines currently being developed. No additional information was offered on “PayFlex”, the South African business.
  3. Z1P’s ANZ transaction volume was led by online channels (71% of total volumes vs 62% in pcp).
  4. NAB was mandated recently to raise an additional $300m through a new note in the Zip Master trust, taking undrawn facilities to ~A$464m to fund Australian receivables.

Changes to forecasts and investment view

We lower our Z1P FY21F/FY22F NPAT each by A$10m, off a low base. Changes reflect mainly a reduction in revenue growth assumptions in all years.

Our price target is lowered (login to view target price). Z1P continues to execute well and we see longer term upside if Z1P can achieve its vision of becoming a global payments player. Add maintained.

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