Zip falls as UBS halves target price

A horror run for the buy now, pay later sector has continued with Zip Co shares falling more than 5 per cent after analysts at UBS cut in half their price target for the company.

UBS says it expects credit quality at Zip Co ‘to remain soft this half’. Picture: NCA NewsWire / John Gass

A horror run for the buy now, pay later sector has continued with Zip Co shares falling more than 5 per cent on Thursday after analysts at UBS cut in half their price target for the company.

“Contrary to industry practice, many BNPL businesses present their credit performance as a percentage of sales processed … We believe a more appropriate methodology is against gross receivables,” the bank’s analyst, Tom Beadle, wrote in a note.

On this basis, Mr Beadle estimates Zip’s annualised bad and doubtful debt expense increased to 12.4 per cent on an annualised basis in the first half of the financial year, against 7.4 per cent in the 2021 financial year.

The bank has a price target on Zip of 45c, down from 90c.

The increase in bad and doubtful debt was attributed to acquisitions and a combination of the removal of pandemic-­related economic stimulus, higher interest rates and inflation placing pressure on households – as well as a potential reduction in customer quality “as a result of pursuing top-line growth”.

“With Zip’s arrears growing as a per cent of receivables, we expect credit quality to remain soft this half, with initiatives taken to improve credit performance more likely to impact in the 2023 financial year,” Mr Beadle wrote.

The higher rates environment and increased share dilution assumptions as a result of Zip’s convertible note also drove UBS’s reduction in Zip’s valuation.

“In order for Zip to achieve profitability, it needs to achieve revenue and cost synergies with Sezzle, an improvement in credit performance, and organic growth. This will involve growing its receivables – which in our view means taking on more risk.”

Zip shares fell 5.2 per cent, or 3c, to close at 54c.

The new UBS analysis follows warnings from Morgan Stanley that recent fundraising by rival Klarna has meant the value of an investment in the Swedish BNPL company held by Commonwealth Bank was worth $2bn less than what was on its books.

CBA first invested $US100m for a 1.8 per cent stake in Klarna, before increasing its holdings by $US200m in early 2020.

Klarna and the bank have jointly funded and share ownership in the local BNPL business. CBA’s stake was valued at $2.4bn in its latest financial report, released in February, down $100m.

But analysts at Morgan Stanley, in a brief note to clients earlier this week, said a cut in Klarna’s valuation at a fundraising round – from $US46bn to only $US6.5bn – would have a significant impact on CBA.