Zip Co: Solid growth continuing
About the author:
- Author name:
- By Richard Coles
- Job title:
- Senior Analyst
- Date posted:
- 23 July 2021, 8:30 AM
- Sectors Covered:
- Insurance, Diversified Financials
- Zip Co's (ASX:Z1P) 4Q21 update showed continuing strong growth momentum across the group, with key metrics increasing ~13%-14% sequentially.
- With growth trends broadly reasonable, the size of the share price weakness (-8%) on the day was somewhat of a surprise, in our view. However, we do note factors including no comment on recent media speculation of potential corporate interest in Z1P and some rise in arrears.
- We downgrade our Z1P FY21F/FY22F EPS by 1% & 27% (off a low base). Our PT falls to (login to view).
- We continue to think Z1P management have executed well and we see longer term upside if Z1P can execute on its ambitions of becoming a global payments player. ADD maintained.
Event: The update in brief
Zip Co (ASX:Z1P) has provided a 4Q21 trading update. Overall we saw this as another broadly solid quarter of growth for Z1P with group revenue (A$130m), merchants (51.3K), and customers (7.3m) all increasing 13%-14% on the 3Q21 level (+85%-110% on pcp).
Additionally, Z1P noted that its US revenue margin (+7%) remains stable, while Z1P’s ANZ bad debt charge was also largely unaltered on 3Q21 (1.82% vs 1.78%).
Z1P also disclosed new partnering relationships with global payment giants Stripe and Adyen, allowing merchants on these platforms to access the Z1P APM. Finally, Z1P has launched in Canada and Mexico, while its US Debt facility has been extended to US$400m at an improved weighted average cost of capital.
Overall, Z1Ps 4Q21 group growth rates across key metrics (~13%-14%) were solid, in our view, and largely mirrored the momentum seen in 3Q21 (+13%-18% sequential growth).
The key US business also delivered healthy growth rates (+16%-18% in revenue and customers) not dissimilar to the last quarter (+14%- 19%). In ANZ, sequential revenue growth (+6%) was slightly down on the 2Q21 level (11%), with the introduction of ‘Tap and Zip’ seeing a mix change with strong volume increases (+14% sequentially) accompanied by declining average transaction values.
With Z1P growth trends broadly reasonable, the size of the share price weakness (-8%) on the day was somewhat of a surprise, in our view. However, we do note the quarterly made no comment about recent media speculation of potential corporate interest in Z1P.
Other areas of weakness were arguably; some increase in group arrears levels (1.78% vs 1.20% in 3Q21), no mention of the US NTM level (although we understand this is largely unchanged on last quarter = >2%); and US revenue growth in the last two quarters (15%-18%) not being at the blistering 1Q21 level (~100% sequentially, albeit off a much smaller base).
Forecast and valuation update
We downgrade our Z1P FY21F/FY22F EPS by 1% & 27% (off a low base). Our PT falls to (login to view).
Our Z1P earnings changes reflect slightly reduced revenue growth forecasts, but more particularly lower margin expectations as Z1P invests to grow (noting Z1P has entered several new markets, e.g. the UK, Canada and Mexico).
Z1P’s growth profile remains impressive and we think management has strong credibility after solid strategic execution over numerous years.
The recent Z1P convertible notes issue has also provided a strong balance sheet to support growth and we see significant upside if Z1P can achieve its vision of becoming a global payments player. Trading on 8x EV-to-revenue, Z1P trades at a healthy discount to key peer APT (~19x).
Key risks to our ADD call are: 1) any slowdown in sales momentum; 2) competition affecting margins; 3) an inability to execute on the overseas expansion; 4) bad debt risks; 5) higher funding costs; and 6) regulatory change.
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