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

Expanding penetration via Pocketbook personal financial management: Zip Co Ltd (ASX: Z1P) 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. With this move, Pocketbook became the first app in Australia to integrate with the open banking platform enabling clients with the option to connect and manage their personal finances. The group bought Pocketbook in 2016 as its integration coincides the focus on establishing Australian open banking standards that enables consumers with the power to easily and securely share their data with third party providers. Pocketbook aim is to offer customers access to their data, foster transparent financial decisions and promote competition within a safe and trusted framework. The idea of this app is to offer great user experience like Facebook or Google.
 

Performance till date (Source: Company reports)
 
Building retail customers: The group added Spotlight Retail Group client to use their interest-free payments platform. This Interest free payments would be a strategic addition to Spotlight Retail Group for customers across both brands, especially those in the market for investment purchases like sewing machines, kayaks, boating and camping equipment. Z1P would be available online for both brands immediately and in-store in 2018. The group values Spotlight and Anaconda addition to their client base given their priority of putting customer experience first. Z1P also added Fantastic to their client base who has 77 stores nationwide. They made a strategic partnership with Quest Payment Systems, who is a leading provider of payment terminals, payment infrastructure and retail technology. With this partnership, zipPay extended its reach, 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. Kogan.com who is Australia's largest pure-play online retail website, joined the Zip platform. More than one million active Kogan.com clients got access to the zipPay digital wallet at checkout, enabling shoppers a limit of up to $1,000 and the ability to pay flexibly, over time for their purchases, interest-free. Kogan.com has more than one million active customers and is the largest Australian pure-play online retail website.
 

Growing customer engagement (Source: Company reports)
 
Unique business model: The group provides for a leading consumer finance option in market that is mobile, 100% digital and payments-oriented unlike plastic cards company. They offer a simple, fast and fair mobile credit and payment solutions, with a strong focus on interest free. Z1P offer better terms, with the simplest sign-up experience while their solutions are proven to turn browsers into shoppers, with an over-index to millennials. The group’s proprietary decision technology leverages more data than standard industry practice. Z1P offers a fully integrated online and instore solution.
 
Regulated Provider: The group is a fully licensed and regulated credit provider with an Australian Credit License and Financial Services License, and has a strong focus on responsible lending. Their business was intentionally designed with the regulatory framework in mind, balancing the compelling commercial opportunity and superior user experiences while catering to required consumer and credit protections. Every applicant undergoes a major application process, including third party credit and identification checks, before an account is provided. As a result, the group saw a major fall in number of applications. Z1P also uses major amounts of additional data to assess each application and ensures that their product is suitable for each customer. Z1P is targeting more than $300 billion target market opportunity. They currently have only 0.1% of the market captured (in TTV) and thus, there is a solid room for growth.
 
FY17 performance: Z1P delivered an outstanding revenue growth of 431% for fiscal year of 2017, while their transaction volume surged over 348% against FY16. 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 growth 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.
 

Fiscal year of 2017 performance (Source: Company reports)
 
Funding position: The group used $29.9 million to repay costly mezzanine capital for their funding structures. On the other side, they have $16.8 million cash on hand as at the end of September of which $3.7 million were restricted. Their Cash outflow to operations were cut from $3.9 million in the fourth quarter of 2017 to $2.7 million as of the first quarter of 2018. The group has $413 million in current debt commitments for receivables program as of year-end. The rise in receivables as compared to FY16 was driven by strong originations and re-transaction activity by customers. The group processed $230 million of transaction volume on the Zip platform to 30 June 2017. Z1P had over $521 million in aggregate account limits with 34% utilization as of the end of first quarter of 2018. They have a healthy repayment profile with 13% of receivables, repaid each month in 2017, while this reached 14% as of the first quarter of 2018. The group bad debts that continued to trend towards 3% as the loan book matures. Z1P is iterating and enhancing their proprietary credit and fraud decision technology to boost their decisioning process. They continue to improve their repayment profile with average time of 7 months while increased the usage of machine learning for decisioning process.
 

Underlying credit performance (Source: Company reports)
 
Positive Outlook: Big Zip days were seen on Black Friday and Cyber Monday with $2.4 million and $2.2 million, respectively, in transaction volume. The receivables book reached $200 million while the group is on track to have a record quarter in excess of their earlier guidance of $115 million in transaction volume. Management is confident to achieve a positive cash flow on a monthly basis by the end of FY18 (a cashflow breakeven on a monthly basis expected in FY18). Z1P continues to boost their retail wins in the second quarter. They are improving funding capacity and funding programs. The group is expecting to see benefits from their major investment in platform to date such as cloud infrastructure and handling volume.
 

FY18 Goals (Source: Company reports)
 
Stock performance: The group changed its name to Zip Co Limited from ZipMoney Limited. The new name was effective from 7 December 2017. The ASX Code changed from ZML to Z1P with effect from Monday, 15 January 2018. Given the fact that Z1P is boosting the merchant as well as customer base by 6x and 9x, respectively, in one year, and their platform is well positioned to support further rise in volumes at little additional cost, there still exists a room for growth. The shares of Zip Co made a positive start to the new year and surged over 27.5% in this year to date (as of January 22, 2018). The group is expected to witness a strong FY18 with upside from low capex business, funding facilities, expanding customer and merchant base, and Pocketbook acquisition. We give a “Speculative Buy” recommendation on the stock at the current price of  $0.87


Z1P Daily Chart (Source: Thomson Reuters)

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