Zip Co: Lots of cash now to support growth

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
15 April 2021, 2:30 PM
Sectors Covered:
Insurance and Diversified Financials

  • Zip Co (ASX:Z1P) has successfully priced a A$400m senior unsecured convertible note, at a 35% premium over the Reference Share Price (A$9.18).
  • Post raising, Z1P has around A$500m of cash (MorgansE) to support its growth aspirations. This takes any further capital raisings off the agenda for an extended period (ex any unforeseen corporate activity) in our view, really for the first time in the Z1P story to date.
  • Conversion of the convertible bond will see 32m shares issued, which we factor into our diluted EPS (roughly ~5% dilution when Z1P becomes profitable). Our price target falls (login to view) on the impacts of this dilution.
  • We continue to see longer term upside if Z1P can execute on its ambitions of becoming a global payments player, and maintain our ADD recommendation with Z1P still trading at a significant discount to APT (EV-to-sales multiple of ~15x vs ~38x).

What happened

Z1P has successfully priced a A$400m, senior unsecured convertible note. The initial conversion price is A$12.39, which represents a 35% premium over the Reference Share Price (A$9.18).

The notes, which are zero coupon, will mature on 23 April 2028, unless redeemed, repurchased or converted in accordance with their terms and conditions. The proceeds will be used to drive growth in Z1P’s core markets, expand into new regions and for general corporate purchases.

Issued at a solid premium

We see the premium achieved by Z1P on these convertible notes as again healthy, albeit noting it is below the premiums achieved on the convertible notes and warrants issued as part of the Quadpay acquisition (40%-50%).

These notes issued today obviously have the benefit of being zero coupon (supporting Z1P’s near-term cashflow), and reducing nearterm dilution. However, clearly the trade-off being bondholders benefit at the expense of shareholders, when Z1P’s share price moves above the conversion price (A$12.39).

This has obviously been the case in regards to the Quadpay convertible notes which had an initial conversion price of A$5.53.

In a strong cash position now

At the 1H21 result, Z1P had A$142m of cash on balance sheet (ex restricted cash), so with this raising we estimate Z1P has around A$500m of free cash to support its growth aspirations.

This takes any further capital raisings off the agenda for an extended period (ex any unforeseen corporate activity) in our view, really for the first time in the Z1P story to date.

Changes to forecasts and investment view

We incorporate the impacts of the convertible bond issue into our numbers. Conversion of the bond will see 32m shares issued, which we factor into our diluted EPS (roughly ~5% dilution when Z1P becomes profitable). Our PT falls (login to view) on the impacts of this dilution.

We continue to see longer term upside if Z1P can execute on its ambitions of becoming a global payments player, and maintain our ADD recommendation with Z1P still trading at a significant discount to APT (EV-to-sales multiple of ~15x vs ~38x).

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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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