Australia | Nov 08 2019
Payment provider Zip Co has been boosted by the announcement of a strategic partnership with Amazon Australia.
-To pay for market access Zip Co will provide warrants to Amazon
-Revenue model less reliant on BNPL than Afterpay Touch
-Can Zip Co replicate Afterpay Touch's significant offshore expansion
By Eva Brocklehurst
A major strategic partnership in the Australian online retail channel has put payment provider Zip Co ((Z1P)) in the spotlight. Amazon Australia will offer its first Australian instalment payment option on Amazon.com.au with Zip Co providing the service.
Amazon.com.au will make the Zip Co Buy Now Pay Later (BNPL) service available on all products without size restrictions. Amazon Australia appears keen to adopt new products to gain volume, Shaw and Partners observes, against the international company standard of offering its in-house payment option.
Amazon has had a slow start in Australia since its launch in December 2017 compared with expectations but Morgans notes it generated around $290m in sales in 2018 and further traction is more than likely.
Business traction data for Amazon Australia is relatively unknown as the company is quite secretive, yet Shaw and Partners estimates that on current annualised run rates and typical online check-out share, Amazon Australia could add around 15% to Zip Co's current total transaction value. It is also the perfect customer segment for targeting customer acquisition.
Upon launching with well-known retailers, Zip Co has had an immediate change to transaction value and share of check-out vs other payment options. Shaw and Partners notess Zip Co now has more than 18,000 merchants and is adding 20 per day, while average expenditure per merchant is rising more than 35% annually.
Zip Co will pay for market access, providing Amazon with warrants. The company will give 14.6m warrants to an Amazon affiliate with an exercise price of $4.70. A portion will vest immediately and the remainder is subject to milestones based on volumes. The warrants can be exercised up to seven years after the issue date. This provides significant upside for Amazon, Morgans suggests, noting the deal is not exclusive, although the strategic alignment provides some protection (hopefully).
Shaw and Partners expects an immediate economic interest that will create value for Amazon Australia if share price for Zip Co rises above $4.70. The advantage for Zip Co is the addition of a leading global e-commerce platform as a potential shareholder alongside Westpac Banking Corp ((WBC)).
Morgans believes, outside of the announcement, management has executed well and the business has re-rated strongly over the past year. However the current valuation is fair, pending evidence of traction in the offshore growth strategy.
UBS prefers Zip Co to its main rival, Afterpay Touch ((APT)), as it has less exposure to BNPL and the associated risks. Currently, the portfolio income is split 40% BNPL and 60% ZipMoney (regulated credit). The company's revenue model relies on both consumers and merchants, and the market has been more conservative in pricing in assumptions.
UBS, too, agrees this a positive development for Zip Co's prospects in the core Australasian market. Moreover, there is upside in overseas markets, although the company lacks a first-mover advantage, and from Pocketbook, a personal finance/budgeting app.
The broker acknowledges Zip Co remains a relatively early-stage and somewhat speculative investment but the current risk/reward outlook is considered favourable and, given the sell-off in the shares over the past three weeks, upgrades to Buy from Sell.
UBS flags transaction volume growth of 111% in the first quarter and notes transactions per customer were also encouraging in the lead up to the usually strong festive season.
The launch of Zip Biz and the acquisition of PartPay also have potential to transform the business. Indeed, Shaw and Partners wonders whether there is potential for Zip Co, through PartPay to launch in the UK, noting the material uptake in volume and reverse enquiries from multinational merchants that drove Afterpay Touch's US and UK expansion.
The broker, not one of the seven monitored daily on the FNArena database, reiterates a Buy rating and target of $4.78. While not covering Zip Co, Bell Potter, also not one of the seven, believes the deal with Amazon is a further endorsement of the BNPL sector, noting Afterpay Touch has an alignment with VISA in the US.
FNArena's database has three Buy ratings. The consensus target is $4.20, signalling 0.3% upside to the last share price.
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