MBL ReportZip Co. (Z1P AU)Buy now, might pay laterKey points...

MBL Report
Zip Co. (Z1P AU)Buy now, might pay laterKey points Increased risk appetite driving elevated BDDs. Rebranding has impacted web traffic volumes. CACs likely to continue trending higher to keep up with larger peers.Event• We review our Zip thesis following the FY21 result.Impact• Increased risk appetite driving elevated BDDs: In 2H21 Zip saw a materialuptick in their bad debts written off, particularly from QuadPay where BDDswere ~25% of closing receivables and ~1.8% of TTV. There is someseasonality, but a doubling HoH is more material than usual as stimulusmeasures ended in the half. Management confirmed they increased their riskappetite in November for customer acquisition purposes and we thereforeanticipate BDDs to remain elevated in the near-term. We see a risk BDDs willremain elevated to support customer acquisition, resulting in a lower qualitycustomer base to larger peers.• Rebranding has impacted web traffic…: In mid-August QuadPay wasrebranded to Zip. Web traffic data from Similarweb shows a material decline inAugust on a combined basis with monthly volumes reducing to 4.23m from5.56m in July. The July trading update for QuadPay of 240% growth impliesUS$238m of TTV. This run-rate suggests US$714m of TTV vs US$660m in4Q21, although lower web volumes and APT now being offered on FashionNova could slow this run-rate for the remainder of the current quarter. Thisalso puts the $1 per instalment convenience fee at further risk.• …and will likely drive CACs higher: Customer acquisition costs have beentrending higher following the QuadPay acquisition (2H21 $26; 1H21 $17), withthe rate of new customer growth slowing and marketing expenses increasing.This trend is being seen across the sector. We expect there to be upwardpressure on marketing expenses following the rebranding in order to limit thewidening gap in customer numbers to larger peers.Earnings and target price revision• EPS changes not meaningful as near-0. We materially increase cash cost ofsales and opex in the near-term from higher BDDs, bank fees and marketingexpenses, which impacts cash EBTDA by ~9-16% from FY26-30. Our targetprice moves to $5.70 (from $6.15) reflecting our cash EBTDA changes and aslightly lower risk-free rate (2.40% vs 2.52%).Price catalyst• 12-month price target: A$5.70 based on a DCF methodology.• Catalyst: 1Q22 business update, Oct-21Action and recommendation• Maintain Underperform. Reduced customer growth, subdued web traffic andelevated BDDs leave us cautious on the outlook with Zip about to cycle verystrong months from Sep-Dec. Key upside risk from M&A or partnerships