Small Caps | Feb 05 2019
The product suite of financial technology company Zip Co continues to resonate and strong growth is expected.
-Benefits from a festive season tailwind and new major merchant clients
-Transaction volumes rise more than 60% sequentially in the quarter
-Catalysts include additional signings of major merchants
By Eva Brocklehurst
Financial technology company Zip Co ((Z1P)) had a bumper December quarter, with growth rates of both revenue and customer numbers at the highest levels in four quarters. The company provides a variety of integrated retail finance offerings to small and medium enterprises, both online and in store, and has benefited from acquiring new retailers amid a festive season tailwind.
The highlights for Ord Minnett were revenue, 7.7% above forecasts, and costs, -11% below forecasts. Meanwhile, gross bad debts continue to improve and were better than expected.
The broker notes the product suite continues to resonate, as customer numbers increased 20%, supported by an increase in average order value. The broker maintains an Accumulate rating with a $1.20 target. Operating cash flow for the half year was $7.1m and slightly ahead of estimates.
Transaction volumes were 29% ahead of estimates, at $304.4m in the quarter, and grew more than 60%, sequentially. The closing receivables balance of $489m was 14% above Ord Minnett's estimates.
The company has noted further evidence of growing operating leverage, with total cash costs to average receivables declining -1%. Morgans notes this ratio has fallen -7% over the past year and management targets a further -3% decline over the medium term.
Zip Co expects to complete a new financing structure in the June quarter, which should increase scale and lower its costs. Funding facilities have been increased by an additional $100m to $631m.
Morgans is also encouraged by the performance on bad debts and continues to like the story, although observes the company has been somewhat overshadowed by Afterpay Touch ((APT)).
Further catalysts include additional signings of large merchants and de-risking as the business move closer to profitability. Morgans maintains a Speculative Add rating, noting the business is more suitable for investors with a higher risk tolerance. The broker's target is $1.30.
Shaw and Partners highlights the future business from merchants with large turnover, including Kogan ((KGN)), the retail operations of Wesfarmers ((WES)), such as Officeworks, Bunnings and Target, Virgin Australia ((VAH)) as well as Super Retail ((SUL)). Adding to this boost was a strong quarter for retail marketing promotional activity.
Shaw and Partners has a Buy/High Risk rating with a $1.60 target. Zip Co does not target sub-prime or payday borrowers and offers a cloud-based platform which leverages its technology and big data.
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