Zip Co Limited

Strong Quarterly Revenues Witnessed in Q3 FY 2019: Zip Co Limited (ASX: Z1P) reported quarterly revenue amounting to $23.0 million and the company also witnessed strong growth in the receivables. Even though the transaction volume witnessed the fall of 8%, the company’s total transaction numbers were flat over the quarter because its focus towards driving the monthly active usage delivered positive results. Also, the company managed to raise ~$57 million in the equity to ramp up the growth and capitalise on the large market opportunity in BNPL and credit card sectors.


Key Operational Metrics (Source: Company Reports)

The yield on the receivables portfolio decreased to 17.2% in Q3 as compared to 17.8% in Q2 mainly because of lower average merchant fees from the enterprise merchants which were onboard earlier in the financial year, which made a relatively higher contribution to transaction volumes in Q3 FY 2019. In March, the company raised a total of $56.7 million in equity (before costs) and the proceeds would be utilised towards a product, tech, and data science, customer acquisition, to make an entry in new markets and towards balance sheet. However, they would also be used for the expansion of product range and towards platform monetization.

What To Expect: Z1P has been in a strong position with respect to its growth trajectory, as seen lately.The company plans to take the advantages of operating leverage as it continues to scale.The company signed a wholesale agreement with Adyen which allows them to market Zip to Australian clients. The strengthening of the balance sheet can also act as a tailwind for the company moving forward. The company stated that it is in a strong position to deliver on the strategy and guidance. 

Stock Recommendation: The stock of Z1P has witnessed significant increases in the past few months. Over the span of the previous three months, it increased 148.07% while, in the span of previous one month, it encountered the rise of 69.01%. It can be assumed that these increases have pushed the stock closer to the 52-week high. Therefore, it can be said that most of the primary catalysts have been discounted at the current juncture. On the valuation front, the company reported a higher EV/Sales and P/B multiples of 13.5x and 41.4x respectively against the industry median of 4.3x and 3.0x respectively indicating the stock to be overvalued. Hence, considering the above factors and current trading juncture, we give a “Sell” recommendation on the stock at the current price of A$3.060 per share (up 5.882% on 30 April 2019).
 

EML Payments Limited

Signing of Agreement With bet365: EML Payments Limited (ASX: EML) had recently made an announcement that its wholly owned subsidiary, named EML Payments USA LLC, entered a multi-year agreement with Hillside (New Jersey) LLC, which is trading as bet365, for the provision of bet365 branded reloadable card program in state of New Jersey in the US. As per the agreement, EML would be giving bet365 customers an easy to use Reloadable card to both remit funds into their gaming account alongside the product supporting fast access to the winnings. There are expectations that the initial program would be launched in mid-2019 after the regulatory approvals.

Total Gross Debit Volume of 1H FY 2019 (Source: Company Reports)

The company’s GDV witnessed the rise of 16% over the prior corresponding period and stood at $4.15 billion. The growth in the company’s GDV was helped by organic growth of $300 million from the programs in market for over 12 months and $270 million from the programs in the market for less than 12 months.

What To Expect From EML: Based on the results in 1H FY 2019, EML updated the revenue guidance for 2019 financial year and now expects it to be in the range of $88 million-$94 million from the previous guidance of $82 million-88 million. However, the company has narrowed EBTDA guidance to between $27 million-$28 million from the previous guidance of $26 million-28 million. Also, the company happens to be debt free and is having $50.1 million of cash on hand.

Stock Recommendation: The stock of EML has delivered the return of 29.90% in the span of previous six months while, in the period of previous three months, the return stood at 37.68%. The company’s underlying operating cash inflows amounted to $10.9 million which implies the conversion rate of 79% of EBTDA which happens to be at the top end of the management expectations.
Considering the above factors, we maintain our “Hold” rating on the stock at the current market price of A$1.960 per share (up 0.256% on 30 April 2019).
 

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