Exert from UBS research note. It's a buy in their opinion."Zip...

Exert from UBS research note. It's a buy in their opinion.

"Zip CoStorm in a teacup?Strong share price run had set a high bar; 2Q update slightly mixedFrom an operating metrics point of view, ZIP's 2Q update was largely in line with consensus, namely US customer numbers (+6%y/y), transactions (+32%y/y) and TTV (+39%y/y). ANZ TTV saw marginal growth for the first time since 2H23 and growth in TTV per active customer continued to accelerate (+7%y/y). In our view, the large share price selloff was driven by a number of factors: 1) Group revenue missed expectations driven by ANZ rev yield miss; 2) Cash EBTDA missed consensus with operating margins declining 10bps q/q vs 1Q24; 3) Operating costs were higher than expected in 2Q; 4) There has been a sequential moderation in TTV per active customer growth in the US (which currently drives ~80% of US TTV growth); and 5) Crowding and positive investor positioning heading into the result. That said, we think the share price reaction was overdone in the context of the update and continued strong growth in the US, but also recognise this name will be very sensitive to changes in earnings momentum given the strong share price run. Retain Buy rating.Seasonality and timing explains a large amount of the delta vs consensusThe ANZ revenue margin of 10.2% in 2Q24 was down materially on a sequential basis but only down 30bps y/y. A couple of factors are at play here and we forecast a much stronger margin in 2H25: 1) Higher TTV seasonality in Q2 combined with a much slower book turn in ANZ means there is a revenue lag beyond just the quarter resulting in a lower yield; and 2) Through CY24 the shrinking ANZ TTV/receivables had a positive impact on yield and now it's back to growth those figures are hard to comp. This ANZ yield reversion drives our forecast re-acceleration of group revenue in 2H25. On the Cash EBTDA miss vs consensus, we understand this was driven by OPEX (as opposed to cost of sales) and there was some pull forward of growth investment in 2Q. ZIP continues to expect 6-10% OPEX growth in FY25 which implies this is not an ongoing step-change upwards in OPEX in the near term.Earnings changesWe trim our top-line growth assumptions over the medium term as well as operating margins. We now sit at an operating margin of 13%/16% in FY25/26e respectively (within ZIP's guidance range of 12-17%). Cash EBTDA cuts are -4%/-13% in FY25/26e.Valuation: A$3.35/sh (DCF-based PT), previously $3.65/shOur PT is lowered by 8% to $3.35/sh to reflect a slightly lower pace of earnings growth over the medium term.