Zip Co Limited

Z1P Details

Q4FY21 Results Updates: Zip Co Limited (ASX: Z1P) offers point-of-sale credit and payments to customers in Australia.

• Increase in Revenues: The company reported group revenues of $129.9 million during the period, reflecting an increase of ~104% y-o-y, owing to continued BNPL expansion strategy across both the developed and emerging markets.
• Rise in Transaction Volume: The quarterly transaction volume stood at $1.8 billion, depicting a rise of 116% year over year. The transaction numbers grew by ~230% y-o-y to 14.2 million in Q4.
• Robust Customers & Merchant Growth: Customer numbers in 4QFY21 rose by 87% on pcp and came in at 7.3 million. There was also an increase in the merchants on the platform to 51.3k, signifying a rise of 84% year over year.
• Acquisition Synergies: Implementing its global strategy, Z1P agreed to buy the outstanding shares in both Twisto Payments (Europe) and Spotii Holdings Ltd (Middle East).
• Debt Facility: During the quarter, the company augmented Goldman Sachs debt facility, thus, offering a decent capacity to assist more than US$5 billion in annual transaction volume.
• Geographical Expansion: The company experienced robust growth in app downloads worldwide. Notably, Zip US (Quadpay) and Zip ANZ app downloaded were more than 1.5 million and 241k times, respectively, in 4QFY21.
• Issue of Seniors Notes: The company issued A$400m zero coupon senior unsecured convertible notes, with maturity on 23 April 2028. The funds were raised to hasten the company’s global expansion.

Transaction Volume Highlights (Analysis by Kalkine Group)

Partnership Deal with Propell:

• On 1^st July 2021, Z1P and Propell Holdings Limited (ASX: PHL) entered a partnership deal to launch Z1P’s Buy Now Pay Later (BNPL) product on the Propell Platform.
• Per the deal, Propell will offer a fully integrated payments solution with Z1P to its platform customers, thus, aiding clients to pay with Z1P’s interest-free BNPL payment solutions.

Key Risks: The company’s mode of operation dependents on technology, and any disruptions to it might impact the company’s business.  The company may see an impact on its profit margins with a severe movement in interest rates.

Outlook:

• The company has witnessed continued impetus in Quadpay, with decent growth being delivered through its differentiated approach.
• The robust key numbers in Q4FY21 demonstrate increased traction in business and the adoption of Z1P's products by consumers.
• The company expects to complete the Spotii acquisition in Q1FY22 and the Twisto acquisition in Q2FY22.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

ZIP's prices witnessed a decent upside movement in the past couple of sessions and now trading around a downward sloping trend line resistance level AU$8.100, indicating the possibility of a downside correction hereon. On the daily chart, the leading indicator RSI (14-period) is trading at ~57.06 levels and indicating a sideways to a positive direction for the stock. Now an immediate resistance level for the stock appears at AU$8.100 while support is at AU$6.550 level.

Stock Recommendation:

The company has reported a loss of $453.77 million in 1HFY21, which expanded from $30.35 million reported in the year-ago period. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price which reflects a decline of high single-digit (in % terms). We have applied a slight discount to EV/Sales Multiple (NTM) (Peer Average) considering negative ROE as well as negative net margin.

The stock of the company rose by ~32.99% in 9 months. It has made a 52-week low and high of $4.960 and $14.530, respectively.

Considering the movement in the stock price in the past few months, we give a “Sell” rating on the stock at the current price of A$7.920 per share (Time: 3:04 PM (GMT+10), Sydney, Australia) on 3^rd August 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

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