Zip share price: why one top broker sees more upside on the horizon

UBS sees further upside for the Zip share price – though the investment bank views the recently completed cap raise as mostly immaterial to its valuation.

Still a ‘buy’

The Zip (ASX: Z1P) share price has fallen today, after the company's stock resumed trading following the completition of a $60m capital raise initiated last week.

By 1:32 AEST Zip’s shares were down 4.21% – ultimately bringing it more in-line with the capital raise placement price of $3.70 per share.

Though the market has proved somewhat skittish, UBS has taken today as a chance to reiterate their BUY rating and 12-month share price target of $4.80 on the fast-growing buy now pay later company (BNPL).

Interestingly, UBS noted that this cap raise had a ‘relatively’ immaterial impact on their valuation of the stock.

Moreover, while the investment bank’s 12-month price target implies significant upside, UBS stressed that because Zip is still a relatively early-stage company, the investment is somewhat speculative in nature.

Even so, this hasn’t stopped UBS from predicting significant top and bottom-line growth from the young BNPL company in the years ahead.

On the top-line, UBS sees Zip growing its revenue from an estimated $167m in FY20 all the way up to $502m in FY24.

Earnings (net earnings) are expected to grow in step – transiting from an $11m loss in FY19 to an expected $10m gain in FY20 and running as high as $88m in FY24.

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Zip share price: the impact of regulation?

UBS also took today as a chance to ponder the potential implications of the RBA’s recently released ‘Review of Retail Payments Regulation’ – Issues Paper.

As it relates to the likes of Zip (ASX: Z1P) and Afterpay (ASX: APT), this Issue Paper highlights the impact of and relationship around the ‘no-surcharging’ rule between merchants and buy now pay later providers (BNPL).

Summarising the issue and as a key section of the Paper revealed:

‘Stakeholders such as smaller businesses have observed that the cost of accepting BNPL payments – in terms of the fees paid by the merchant to the provider – is often in the range of 3–6 per cent and is generally higher than the cost of accepting other electronic payment methods such as cards.’

With it further being added that:

‘Most BNPL providers also have rules that prevent merchants from levying a surcharge on the customer to recover those fees.’

Centrally, if the RBA halted BNPL providers from levying those surcharges, UBS points out that it would rank as a key negative for the likes of Zip and Afterpay.

In saying that, the investment bank not only noted that the true impact of these potential changes would prove difficult to quantify at this point; but that Zip’s business-model – due to its comparably more diversified focus – is less exposed to regulatory disruption relating to these kinds of changes, compared to the likes of Afterpay, which is less diversified.

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