Good afternoon,

Over the easter break, ASX200 had a pretty strong old week, adding 1.5% as technology, healthcare and utilities drove the market higher (all interest rate sensitive I might add.) Telco, mining and energy stocks lagged.

ZipCo (Z1P)

Zip quarterly out today.  You can read it here. Look, its all going well. And the share price is up 16% today on the back of it but (and like I said, no one cares yet)… revenue yields have stalled. And whilst Z1P signing up Chemist Warehouse and these other large merchants is great, they also don’t have much leverage with merchants of that size to negotiate merchant fees – so that means less revenue generated from every dollar lent out. Which means the same incremental risk (i.e. the risk of them not getting that $1 back) without the same incremental return.

Does this mean Z1P is over-valued? Or that it’s a problem they can’t manage or even solve? No.
However, is it important to consider the profitability of each dollar lent out potentially declining through time? Yes.

For the record I still don’t think this stock is particularly well covered or understood by the analyst community. Everyone just looks at revenue growth, transaction volume growth and brand name merchants and forgets about the risk of that growth. If I’m charging Bunnings 3.2% per transaction, I’ve got interests costs of 1.0% and bad debts of 1.8%… any volume that Bunnings gives me is only adding 0.4% to my revenue. Yep, it’s a great client acquistion and ‘volume growth’ strategy… but it doesn’t leave you much wiggle-room with bad debts or increased funding costs…

Movers & Shakers

Bellamy’s (BAL) got a the nod from the Chinese market regulator which should allow them to recommence sales in the China grey market. Long time supporters Bell Potter increased their share price target by 52% to $12.10.

Outside of this, it’s the hgih PE, growth/quality names that did well as a general comment.

One of my least favourite stocks, Flight Centre (FLT) gave a profit warning on Friday, revising their guidance down by about 15%. Long time readers of this note will know my thesis here (who uses a travel agent anymore???).

Elsewhere, mining and energy stocks were the ones that suffered.

Short and sweet (ish) this week as I’m still recovering from the Eagles miserable showing over the Easter break.

Have a good week,