Openpay Group Limited

OPY Details
 
Business Update for May: Openpay Group Limited (ASX: OPY) provides Buy Now Pay Later (BNPL) payment solutions to merchants and customers in Australia, New Zealand, and the UK. In a recent business update, it was notified that the month of May has been the strongest month in the company’s history in terms of growth in Active Plans, Active Customers, Active Merchants and Total Transaction Value. This came on the back of a substantial contribution from ‘OpenMay’.

£25 million of UK funding facility: OPY announced that it has secured a new debt facility of £25 million with Global Growth Capital (GGC), a technology finance provider, having a term of 21 months. From this facility, Openpay will boost its recently launched UK BNPL business and will provide additional support to its strong balance sheet. Initially, the company will receive £10 million of the committed funding. The remaining £15 million will be available once GGC is satisfied with various conditions.

Q3 FY2020 Highlights for the Period Ended 31 March 2020: During the period, OPY reported a new record of its active plans and customers, up by 203% and 113%, respectively. Active merchants increased by 63% on pcp. Total Transaction Value and revenue stood at $45.8 million and $5.3 million, a rise of 80% and 71% relative to pcp, respectively. These figures indicate strong growth in plan volumes, customers, and the propensity of usage. Also, the UK business of the company delivered a solid growth at an early stage, reporting 92,000 active plans and 56,000 active customers.  

 

Active Plans and Customers (Source: Company Reports)
 
Increase in Online Business:Lockdown imposed due to COVID-19 has changed the scenario of channel usage, which is a shift from retail to the online channel. The online business contributed 45% of plan originations and 32% of TTV as compared to last year’s share of 13% and 7%, respectively.

Valuation Methodology:EV/Sales Multiple Based Relative Valuation (Illustrative)
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EV/Sales Multiple Based Relative Valuation(Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:The stock of the company gave positive returns of 69.36% in the last one month and has recorded a new 52-week high of $3.02 in the last trading session on 3^rd June 2020. Currently, the company has funding available for nearly 9 quarters, which includes $45 million of undrawn debt facilities of Australia and $45.6 million of cash reserves. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a price correction of high single-digit (in percentage terms). For the purpose, we have considered peers such as Tyro Payments Limited (ASX: TYR), Pushpay Holdings Limited (ASX: PPH) and Credit Corp Group Limited (ASX: CCP). Considering the price movements and valuation, we suggest the risk-averse investors to book profits at the current trading levels and recommend a “Sell” rating on the stock at the current market price of $3.02, up 51.759% on 3^rd June 2020.

 
OPY Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Zip Co Limited

Z1P Details
 
Update on Acquisition and Capital Raise:Zip Co Limited (ASX: Z1P) offers digital payment and point-of-sale credit services to several industries, including education, health, retail, and travel. Z1P operates under different brands, namely, Zip Pay, Zip Money and Pocketbook.

Acquisition to Accelerate Global Expansion: On 2 June 2020, Zip notified the market that it had acquired the remaining shares in QuadPay Inc., New York based Buy Now Pay Later provider, for $403 million. Under the agreement, the stockholders of QuadPay are entitled to get a maximum of nearly 119 million fully paid ordinary shares of Z1P. These shares of Zip equal to 23.3% of its issued share capital at the completion. With this acquisition, Z1P will strengthen its position as a leading BNPL player across various markets including, Australia, New Zealand, South Africa, the US, and the UK, with combined annualised TTV and annualised revenue of $3 billion and $250 million, respectively.

Combined Metrics (Source: Company Reports)

Capital Raise: On 2 June 2020, Z1P updated the market that it has entered into an agreement with CVI Investments, Inc., an affiliate of Heights Capital Management, which is part of the US-based SIG (Susquehanna International Group), to raise $200 million by way of the exercise of warrants and issue of convertible notes. This agreement is aimed at accelerating company’s growth in the US and other markets. Convertible notes will raise $100 million having a tenure of 5 years at a fixed coupon of $0.75 million/semi-annual instalment. Warrants will raise the balance $100 million, with an initial exercise price and period of $5.1639 and 3 years, respectively.  

Trading Update:In April 2020, Z1P recorded a revenue of $15.1 million, an increase of 81% yoy. Transaction volume for the period was $181.6 million, an upsurge of 86% yoy. April was another strong month for the business, with the company’s product differentiation and penetration into different channels, delivering excellent transaction volume.

Outlook: For FY20, the company is targeting Annualised Transaction Volumes of ~$2.2 billion and is targeting its global customer base to reach the 2.5 million mark by the end of the financial year. While the ATV is expected to meet or exceed the stated target, current economic uncertainty might be a hurdle in achieving the global customer target.

Valuation Methodology:Price/Sales Based Relative Valuation (Illustrative)

Price/Sales Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of the company gained 121.28% in the last one month and is currently trading close to its 52-week high level of $6.79. Despite the economic downturn, the company delivered decent results in April 2020 and is optimistic about its performance in May 2020.The company has achieved significant progress on its global expansion strategy through the recent acquisition and capital raise and has laid strong foundations to become a global leader on the BNPL platform. We have valued the stock using the Price/Sales based relative valuation and arrived at a target price with low single-digit upside (in percentage terms).For the purpose, we have considered peers such as Sezzle Inc (ASX: SZL), Openpay Group Limited (ASX: OPY) and Credit Corp Group Limited (ASX: CCP). Considering the strength of the revenue model, performance in April’20, business prospects in the US, and a strengthened global footprint with the acquisition and capital raise, we give a “Hold” recommendation on the stock at the current market price of $6.35, up 22.115% on 3^rd June 2020.

 
Z1P Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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