Afterpay should acquire Zip: broker

A man wearing glasses and a white t-shirt pumps his fists in the air looking excited and happy about the rising OBX share price

A man wearing glasses and a white t-shirt pumps his fists in the air looking excited and happy about the rising OBX share price

Zip Co Ltd (ASX: ZIP) shares are racing higher on Tuesday morning.

At the time of writing, the buy now pay later (BNPL) provider’s shares are up over 13% to 62.5 cents.

Why are Zip shares on fire today?

It appears that investors have been scrambling to buy shares today in response to the release of a bullish broker note out of Shaw and Partners.

According to the note, the broker believes that the proposed change to BNPL regulations in Australia are actually a big win for Zip. So much so, its analysts feel that the company is now a very attractive takeover option for rival Afterpay, which is owned by Block Inc (ASX: SQ2).

In light of this, Shaw and Partners has reaffirmed its (high risk) buy rating with a $2.02 price target.

Based on where Zip shares are currently trading, this implies potential upside of 220% for investors over the next 12 months.

Why did the broker say?

In response to the proposed changes announced yesterday, the broker expects Zip to benefit from the “levelling the playing field.” It explains:

Broadly we suspect that there is ~30-50% upside medium term to ANZ volumes if and when implemented from levelling the playing field. In particular these changes would benefit Zip in the following ways: 1) Levelling the origination playing field, seeing other providers having similar at check-out hurdles for origination; 2) Potential changes to fees/merchant charges for competitors, noting higher administrative burden through changes; 3) Focus on larger credit limits via customers upfront due to dynamic responsible lending; and 4) Slow down in competition as responsible changes roll through against varying industry experience. Broadly a number of large and small competitors have also ceased operations in ANZ in the LTM and this market is appearing more attractive for further profit growth for Zip.

All in all, the broker feels that this makes Zip a strategically important player in the BNPL industry and an attractive option for further acquirers in the space. It adds:

This change represents a material net positive to Zip. Importantly with market leadership in the digital space in already utilising this process, Zip’s value appears strategically relevant for further acquirers in the space, particularly if you didn’t want to miss a beat. APT should have a crack at Zip.

The post Afterpay should acquire Zip: broker appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Zip Co. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

from The Motley Fool Australia

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