Morgans: Buy Zip and hold AfterpayTom RichardsonBroker Morgans...

Morgans: Buy Zip and hold Afterpay

Tom Richardson

Broker Morgans has weighed in on the great buy now, pay later debate by telling investors both Zip Pay and Afterpay have performed impressively over the COVID-19 shutdown.

Morgans attributes Afterpay's stunning rise since March 23 partly to the news Tencent took a 5 per cent stake in the business. It reckons Tencent could help Afterpay in any number of ways.

"These include: assistance in helping to scale APT’s global payments infrastructure and collaboration on technology, Afterpay potentially becoming a payment option in Tencent's WeChat Pay mobile wallet (1.2 billion users globally, 40k merchants in Australia accept WeChat Pay) and opportunities it may provide to enter new markets like Hong Kong and potentially mainland China," the broker wrote.

Zip co-founder Larry Diamond. Peter Braig

Morgans cautions much of the Tencent excitement is priced into Afterpay's valuation already, with $5 billion added to its market cap since the announcement.

The broker notes Afterpay now trades on a price to sales multiple of 27 times, which is its highest on record and well above the 12 times average over the past two years.

Zip is trading on nine times price to sales, versus its long-term average of six times. The broker points out this is around one third the valuation of Afterpay even if the latter is more advanced in its international expansion strategy.

The broker has upgraded Zip's net profit forecasts by $5 million and $15 million for financials 2020 and 2021 respectively, which translates into a 24 per cent upgrade to its share price target from $3.40 to $4.21.

Morgans has hiked its Afterpay price target from $33.11 to $46 mainly on better bad debt forecasts and stronger sales growth expectations in the US.

For financial 2022 it forecasts Afterpay to make a net profit of $3 million on revenue of $1.04 billion.

On valuation grounds it has a hold rating on Afterpay and add rating on Zip.