Shaw and Partners puts $2 price target on BNPL player Zebit

Ecommerce play Zebit (ASX:ZBT) became the latest US fintech to join the ASX when it listed on October 26.

The company’s offering includes a BNPL service as part of a broader online shopping platform for US customers.

Since launch in 2015, Younis said Zebit has booked around $US183m in total sales, with annual revenue growth rates of around 100 per cent through to 31 December 2019.

After raising $35m from investors at a listing price of $1.58, Zebit has so far traded below parity as markets assess the outlook for ecommerce, BNPL and fintech consumer finance companies.

But in a research note this week, Shaw and Partners senior analyst Danny Younis was more bullish about the company’s near-term outlook.

Value proposition

Applying a discounted cash flow (DCF) model, Younis arrived at a 12-month valuation of $2 per share — a premium of around 75 per cent to yesterday’s close.

The forecast is based on Zebit’s capacity to maintain its historic rates of revenue growth, and resulted in a buy recommendation with a high risk rating.

Shaw and Partners was involved with Zebit’s listing in an advisory capacity as the lead manager and underwriter of the IPO.

Zebit’s ecommerce website is an online merchant platform that sells over 90,000 products across “multiple product categories”, Younis said.

The company runs an inventory-light model by acting as a distributor for 81 different drop-ship partners who pack and ship products on-demand for Zebit sales.

Its income is derived from the difference between the wholesale price paid to suppliers and the retail price charged to customers — which it then uses to fund the BNPL payment model.

Zebit’s core market in the US are customers who haven’t achieved a credit score or don’t always have channels to access traditional credit pathways.

Historically, consumers in that bracket have been more susceptible to predatory lending practices such as payday loans with high interest rates, Younis said.

Via its online marketplace, Zebit effectively extends credit to those customers via a BNPL platform with a six-month repayment term.

Zebit’s BNPL offer is differentiated in that the company uses it for its own ecommerce platform, as opposed to vendor partners. It also charges no late payment fees or interest costs.

Its customer base extends to those with an industry-standard FICO credit score below 620, while other BNPL players limit their service to scores above 640, Younis said.

The strategy provides Zebit with a “huge addressable market”, accessing a population base of around 120 million US consumers.

In its revenue forecast, Shaw and Partners said annual sales are forecast to dip slightly in 2020 to $US82.2m, before accelerating to ~$US160m in 2021 and ~$US280m in 2022.

The 2022 sales projection is forecast to flow into Zebit’s first year of net core earnings, with positive free cash flow of $US3.2m.

For the 2020 year, Zebit is forecast to maintain a doubtful debts provision equal to 14.9 per cent of sales.

However, Younis flagged the company is coming off a strong September quarter where it booked positive EBITDA of $US130,000 and bad debts fell to only 6.3 per cent of sales.

With $35m in additional capital, Younis said Zebit is “ideally positioned for long-term growth, with a very attractive and large addressable market which is very fragmented — thereby enabling the company to pursue and drive scale”.

Younis’ DCF analysis was based on “very conservative” assumptions, with a weighted average cost of capital (WACC) of nine per cent and a terminal growth rate of three per cent, he said.

With a base case of $2 per share, Shaw and Partners applied a valuation range from $1.43 (14% WACC, 1% terminal growth) to $6.74 (8% WACC, 6% terminal growth).