Zip Co Enters Trading Halt, Capital Raise Incoming?

At time of writing, shares of Zip Co Ltd [ASX:Z1P] have entered a trading halt pending the release of an announcement.

The news comes three weeks after the release of its 1H19 half-year results.

The last five months have been excellent for the Zip share price:

Zip Share Price

Source: tradingview.com

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Will Zip engage in a capital raise?

It is conceivable that the upcoming announcement will involve a capital raise.

Below you can see the accounts of the company as per their recently released half-year results:

Zip Share Price

Source: newswire

Z1P Share Price

Source: newswire

The wash-up from this data indicates that it had a loss of approximately $6.7 million in cash, and cash equivalents of $19.2 million.

In the mining sector, people often talk about burn rate.

Burn rate is the amount of cash an explorer/developer is going through on the pathway towards the commencement of mining, and I believe this concept is relevant to understanding Zip.

Basically, if things were to continue the way they currently are going (assuming no further revenue growth), the company would only be able to go about six more quarters before it runs out of cash.

But Zip is a bit different from mining stocks in the sense that it actually has money coming in.

And the numbers look promising.

Its revenue from ordinary activities is up 114% to about $34 million, and now has over one million customer accounts (a 39% increase over six months) and over 12,600 merchants using the platform.

This growth has been underpinned by major retailers, such as Bunnings, Target, Officeworks and Appliances Online, signing on.

It differentiates itself from traditional credit by offering an ‘interest-free’ service by charging a flat fee of $6 a month on any item owned, and an extra $5 if the minimum monthly payment of $40 is not made.

It also charges a 4% upfront fee to retailers.

As the success of companies like Afterpay Touch Group Ltd [ASX:APT] has shown, customers have warmed to this model of paying for things.

But there are some concerning macro-trends at work behind the scenes.

Basically, Australians are already leveraged to the hilt, as you can see:

Zip Share Price

Source: BIS

What’s more the latest NAB Business Survey has recently reported that conditions in the retail segment have deteriorated for five straight months.

It’s a bit like trying to squeeze the last drops of juice from an already pressed fruit.

Food for thought.

Regards,

Lachlann Tierney,
For Money Morning

PS: With retail looming as a tough sector to go long on for the foreseeable future, consider casting your net wider. Greg Canavan as an excellent, insightful look at the three reasons to add gold to your portfolio in this free report.

 


Lachlann Tierney is a writer for Money Morning and has been investing for nearly a decade. With an MSc from the London School of Economics, he brings a sound understanding of global markets to his writing. Lachlann is interested in emerging technologies, energy solutions and helping people invest their money wisely. Recently, he has been working with Phil Anderson and Terence Duffy. They have three publications:

Phil Anderson’s Time Trader
Cycles, Trends & Forecasts
Money Morning Trader


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