Zip Co: US traction encouraging
About the author:
- Author name:
- By Richard Coles
- Job title:
- Senior Analyst
- Date posted:
- 25 February 2021, 6:00 PM
- Sectors Covered:
- Insurance, Diversified Financials
- Zip Co's (ASX:Z1P) reported 1H21 NPAT loss of ~A$453m was impacted by a number of one-off items, e.g. a net revaluation of Quadpay (-A$306m) and performance shares issued due to hurdles being met (~-A$64m). However, even excluding these items, the underlying loss was closer to ~A$114m, well above our estimates on higher expenses (-A$30m).
- While Z1P’s investment to drive growth is higher than we expected, we think momentum across the business remains very strong, particularly the traction the company is gaining in the US.
- We lower FY21F/FY22F EPS by >50% on current year one-offs and allowing for higher investment in all forecast years. We change our valuation from a DCF to a blended DCF/Price-to-sales (PS) methodology, our PT has changed (login to view). Z1P continues to trade at a significant PS discount to APT, and we continue to see upside if it can execute on its strategy of becoming a global payments player.
Result summary
Z1P’s 1H21 NPAT loss of ~A$453m was impacted by a number of one-off items, e.g. a net revaluation of Quadpay (-A$306m) and performance shares due to hurdles being met (~-A$64m).
However, even excluding these items, the underlying loss was closer to ~A$100m, well above our estimates on higher expenses (-A$30m).
Revenue of A$160m (+131%) was broadly in-line with our estimates driven by solid yoy TTV growth of 141% to ~A$2.3bn. Net bad debts were well contained at 1.93%, down on 2.24% in the pcp.
The good
- Australia remains cash EBTDA positive with the group now Cash EBTDA breakeven.
- Z1P has launched in the UK with a number of marquee brands and pointed to a strong pipeline.
- Quadpay’s 1H21 growth was rapid with TTV (A$973m) and customers (3.2m) both up >200% on pcp
- Quadpay’s net transaction margin remains above 2% and this business has improved group capital efficiency, highlighted by an improving repayment velocity and also revenue yield (25% in Dec vs ~16% in June 2020).
- Z1P is now Australia’s most downloaded BNPL App (Dec20/Jan21) while all key growth metrics, e.g. revenue, and customers etc, grew ~40%-60% for the half.
- Average funding costs reduced from 4.7% to 3.9% due to a lower average rate across the AU portfolio.
Things to keep an eye on
- Marketing costs rose over 4 times (~A$26m vs 6m in pcp) with the inclusion of Quadpay, product launches (e.g. Tap and Zip) and increased overall brand activity.
- Z1P continues to be in a high growth phase (and will likely be for some time), which could compress leverage in its cash EBITDA performance near term (1H21 A$0.2m).
- While it's positive that the first tranche of Quadpay performance hurdles have been met, obviously achievement of these milestones has attached dilution.
Changes to forecasts and investment
We lower FY21F/FY22F EPS by >50% on current year one-offs and allowing for higher investment in all forecast years.
We change our valuation from a DCF to a blended DCF/Price-to-sales (PS) methodology, with a revised PT (login to view).
Z1P continues to trade at a significant PS discount to APT (21x vs 35x), and we continue to see upside if it can execute on its strategy of becoming a global payments player.
Find out more
Download full research note
You can find further detailed analysis of company results this reporting season by browsing our reporting season tag, and view a full list of upcoming results on our Reporting Season Calendar.
If you would like access or more information, please contact your adviser or nearest Morgans office.
Request a call
Find local branch
Need access to our research?
You are also welcome to start a two-week trial of our online platform, which provides access to detailed market analysis and insights, provided by our award-winning research team.
Create trial account
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.