Company Overview: Zip Co Limited, formerly zipMoney Limited, offers point-of-sale credit and digital payment services to consumers and merchants. The Company provides a range of integrated Retail Finance solutions to small, medium and enterprise businesses across various industries, both online and in-store. The Company offers its services primarily to the retail, education, health and travel industries. Its products include zipMoney and zipPay. zipMoney is classified as a continuing line of credit and generally applied to various ticket purchases where a promotional interest-free period is applied, between 6 to 24 months. zipPay is a no interest ever digital shopping account and generally applied to various ticket purchases, such as fashion, accessories, food and hospitality. It supports prime, near prime and emerging prime borrowers by providing those customers with a revolving unsecured line of credit to finance their transactions.


Z1P Details

Zip Co Limited (ASX: Z1P) has a unique business model which provides a simple, fast and fair mobile credit and payment solutions, with a strong focus on the interest-free facility. The group offers point-of-sale credit and digital payment services to the retail, education, health and travel industries, estimated at $300 Bn in combined annual transaction volume. The Group further offers lines of credit to consumers through its Zip digital wallet. It has two main products: zipPay which has a limit of $1,000 in total at any time and zipMoney which provides for up to $30,000 of credit, with an interest-free period of up to 48 months depending on the retailer. Revenue is generated from both Merchants (as a Merchant Service Fees) and Customers (as a Monthly Fees, Establishment Fees, and Interest). The Group has a strong focus on interest-free payment behaviour, encouraged through higher minimum monthly repayments, and promotional interest-free periods. For six months ending 31 December 2017, the Group increased Customer numbers from 300,000 to approximately 530,000, similarly the number of merchants accepting Zip increased from 4,400 to over 7,750. The Zip digital wallet can now be accepted at any retailer that offers zipMoney or zipPay, resulting in all 530,000 customers being able to shop across the merchant base of 7,750 members in the Zip network. As the group is intensely focused on delivering a seamless and consistent payments experience across the omni-channel, online, instore or over the phone, thus we expect that the group has a bright outlook in the second half of the year at the back of underlying growth in revenue, gross profit and customers.


Expanding Merchant Base (Source: Company Reports)

Increased usage per customer: The return/ repeat customers have been rising as a proportion of underlying sales over time, reaching 80% as of March 2018 from 52% of prior corresponding period. The increasing adoption rate was mainly driven by increased merchants on board, increased basket size for individual consumers, willingness by consumers to use the service more often, personalized marketing campaigns, and successful unification of the Zip network in December 2017, allowing any Zip customer (with their wallet funded by either zipMoney or zipPay) to transact at any accredited Zip merchant. The company has several initiatives underway that will further drive engagement in the coming periods including investment in the Zip brand and architecture; the Zip native App, and improvements to the store’s directory, which will drive a better browsing and discovery experience.


Transaction Rate - Customer engagement metrics (Source: Company Reports)

Strategic agreements to strengthen its core business: The group has been gradually building its customer base and it had entered into synergistic agreements to propel its core business growth. We expect that these strategic initiatives will help to strengthen the core business in future.

1) Partnership with Officeworks: The group has recently entered into the partnership with Wesfarmers Ltd (ASX: WES) owned Officeworks Ltd. which allows customers to make interest-free payments via officeworks.com.au and more than 160 stores nationally, using their Zip digital account. This strategic partnership will support the groups’ strategic vision and continues to build upon its presence in the home, school and educational sectors. The progressive in-store rollout will commence soon in the first quarter of FY19, followed by an online integration towards the end of Q1 FY19.

2) Teamed up with Super Retail Group Ltd: In the bid to increase market share, the group has added Super Retail Group to the list of companies joining their Zip interest free payments platform. Following this, the group expects that Z1P will launch in-store progressively across the Super Retail Group brands, beginning July 2018.

3) Partnership with Tigerair Australia: The group has inked a new partnership with Tigerair Australia with the objective of expanding Zip platform in the travel and leisure sector.

4) Other strategic partnerships: The group has also signed a strategic partnership agreement with Quest Payment Systems, who is a leading provider of payment terminals, payment infrastructure and retail technology. With this partnership, zipPay increased its footprint, as it would be accepted across Quest Payment Systems' entire Australian network of merchants, including multi-store chain retail, petrol stations, pharmacies, grocery, and public transport systems.

Growing penetration through Pocketbook personal financial management: Over the period, the company made first-of-its-kind integration with Macquarie Banking and Financial Services Group customers enabling them to add their banking and credit card accounts to the Pocketbook personal financial management (PFM) app. As of now, Pocketbook business has over 490,000 users and became a leading Personal Financial Management App in the Australian market. The group bought Pocketbook in 2016 as its integration coincides with the focus on establishing Australian open banking standards that enable consumers with the power to easily and securely share their data with third-party providers. Pocketbook aims to offer customers access their data, encourage straightforward budgetary choices and promote competition within a safe and trusted framework. The idea of this app is to offer great user experiences like Facebook or Google.

Robust Quarterly Performance (31 March 2018): The Company released its third Quarter performance for the period ended 31 March 2018 wherein revenue recorded $11.2 Mn, marking the significant growth of 138% on year on year (YoY) basis. The number of accredited merchants substantially increased by 181% in Q3FY18 and recorded to 8,991 merchants during the same period. This was due to increased new merchants offering Zip, including many well-known consumer brands. The number of active customer accounts (not including Pocketbook users) grew by 217% to 627,843 in Q3FY18 as compared to the previous corresponding period (pcp). Receivables increased by 132% in Q3FY18 as compared to pcp because of recurring nature of the business. The customer repayment profile remains at a healthy 14% of the opening receivables balance repaid each month.


Robust Q3 FY18 Performance (Source: Company Reports)

Quarterly Cash Flow Update (31 March 2018): The company reported a positive operating margin (cash from operating activities) of $1.1m in Q3 FY18. The Company had ~ $17.5 million in cash at the end of the March 2018 quarter. Receipts from customers during the period were $10.9 million which was up by around 18% as compared to the previous quarter. As illustrated in the chart below, the positive operating margin is expected to increase in Q4FY18 as the Company continues to demonstrate operating leverage. The Company’s guidance of cashflow breakeven also includes the impact of bad debt write-offs, which form part of the net movement in receivables. We expect that the growth momentum is on track to turnaround positive cash flow by end of FY18 at the back strong growth across all key operating metrics, steadily increasing gross revenue yield, continued introduction of merchants, large and small, who are benefiting from the Zip platform, and rapidly increasing customer numbers and engagement metrics.
 

Quarterly Cash Operating Margin (Source: Company Reports)

Financial Performance: Z1P delivered an outstanding revenue growth of 431% for the fiscal year of 2017, while their transaction volume surged over 348% against FY16. It posted revenue growth at a significant CAGR of over 170% over FY13 to FY17. However, net income marked a negative CAGR impacted by the rise of selling, general and administrative (SGA) expenses during the same period. The group’s customers enhanced 785% on a year on year (YoY) basis. The Merchant numbers enhanced to 4,400 across Australia and NZ, both online as well as offline. The group got a $40 million strategic equity investment from Westpac which is the major domestic direct investment in a fintech by a major bank. They Partnered with NAB in $260 million for financing, which is major milestone showing a maturing loan portfolio and validates their proprietary credit decision technology. The group reported a 466% growth in portfolio income during the year boosted by the rise in customers, merchants and transaction volume. The group made a major investment in platform while their growing headcount would support the expected advancement. The current ratio stood at 3.66x in the six months as at 31 December 2017 while debt to equity substantially decreased to 5.36x in 1HFY18 from previous six months (13.70x).

Funding Update: At the end of the third quarter, the company has $133.5 million of funding headroom and continues to explore additional options to further increase and diversify the facilities available to fund its growth. The group as of now holds equity of $17 Mn in the different financing programs having connected an extent of Westpac investment proceeds to repay costly mezzanine capital. The group holds the capacity to get to mezzanine capital in the future, empowering the arrival of equity in the receivables portfolio to support development activities and capital use as required.

Positive Outlook: We expect that the outlook for the company is healthy at the back of rapidly increasing customer numbers and engagement metrics, decreasing cost base as a percentage of average receivables due to operating leverage, and synergistic relationships with several players across the market. The Company is on track to achieve cashflow breakeven on a monthly basis by the end of FY18, having experienced positive trends across all measures on its financial dashboard comprising revenue yield (up on quarter on quarter basis), reduced cash cost of sales as a percentage of quarterly average receivable from 11.4% in Q2FY18 to 9.7% in Q3FY18, and reduced cash operating costs as a percentage of quarterly average receivables from 11.8% in Q2FY18 to 10.4% in Q3FY18. Z1P continues to boost their retail wins in the fourth quarter. They are improving funding capacity and funding programs. The group is expecting to see benefits from their major investment in the platform to date such as cloud infrastructure and handling volume.


Financial Dashboard (Source: Company Reports)

Stock Performance: Z1P stock, as per March 2018 Quarterly Rebalance of the S&P/ASX Indices, was added to All Ordinaries, effective from March 19, 2018. Given the backdrop of further growth in customers and integrated merchants, rapid penetration in online retail sales, footprint expansion in  new markets, strong funding facilities, and strategic partnerships, we expect that the growth momentum will be continuing and hence we maintain our outlook on the stock. Meanwhile, the share price of Z1P has risen 26.92% in the past one year with a fall of 3.5% in last three months (as at June 18, 2018) owing to volatility, regulatory risks and competition. It is worth noting that the stock has been up by 289.14 per cent in last five years but down 58.5% since 2010. Based on aforesaid facts and expectations, and current trading scenario, we give a “Speculative Buy” recommendation on the stock at the current market price of $ 0.835 (up 1.212% on June 19, 2018).
 

Z1P Daily Chart (Source: Thomson Reuters)

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