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:

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:

Source: newswire

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:

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

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