FINS1612- Group Assignment T3 PDF

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FINS1612 Capital Markets and Institutions Please complete all areas of this form, sign, and attach to each submitted assignment. Only one cover sheet per assignment

A. STUDENT/S TO COMPLETE Date Due: 19/11/2021

Date Submitted: 19/11/2021

Word Count: 1650

B. GROUP MEMBER’S DETAILS AND CONTRIBUTIONS

(FOR EACH GROUP MEMBER, please complete the form below with your name, ID, and describe the level of contributions in percentage that YOU make towards the research, synthesis and writing-up of the assignment.) Name and the role

Student ID

Number of Meetings Attended

Z5218689 Z5312919 Z5311212 Z5208042

8 8 8 8

(For example, Jerry Smith, FX Specialist) Tony Ding Hasibul Alam Oscar Chong Mohammed Arib

CONTRIBUTION OF EACH GROUP MEMBER Writing Synthesis Research (writing up the (e.g. analysis of (e.g. collection of data, research report) materials, forming articles, new stories and arguments) identification of relevant resources) 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25%

Declaration We declare that this assessment item is our own work, except where acknowledged, and has not been submitted for academic credit elsewhere, and acknowledge that the assessor of this item may, for the purpose of assessing this item: 

Reproduce this assessment item and provide a copy to another member of the University and/or;



Communicate a copy of this assessment item to a plagiarism checking service (which may then retain a copy of the assessment item on its database for the purpose of future plagiarism checking).

We certify that we have read and understood the University Rules in respect of Student Academic Misconduct. Students’ Signatures: T.D, H.A, O.C, M.A

Date: 19/11/2021

FINS1612 GROUP ASSIGNMENT Tony Ding, Hasibul Alam, Mohammed Arib, Oscar Chong

UNSW FINS1612 1

Part A: Hasibul (Economic Specialist) Part A: a) The RBA purchased government securities at $4 billion a week and maintained a cash rate of 0.1% (Lowe, 2021). Z1P price increased for 3 days and then decreased. Assuming low cash rates stimulate more borrowing and spending, this means more demand on Z1P and stock price increases (RBA, 2021). However, the security purchase has increased the quantity of money in circulation, which raises inflation rates, noted by the rise of CPI by 0.8% last quarter: Z1P price decreases. Perhaps investors are more concerned about inflation than current cash rates. b) The cash rate is 0.1% (Lowe, 2021). This promotes borrowing and spending as evidenced with retail trade rising by 1.7% month-to-month (FactSet, 2021), which I believe amuses Z1P investors. Z1P share prices momentarily increased on the same day of the announcement. c) Developed countries including Australia and New Zealand have their actual GDP greater than the estimate (FactSet, 2021). This means their economies are producing above its sustainable limits, and that high global demand is overtaking aggregate supply. Z1P prices fell dramatically throughout the year as this signifies looming interest rates, creating uncertainty for Z1P investors. d) Factset mentions the Covid-19 impact on Z1P was 1%. Consumer Sentiment index remained above 100 throughout the year, signifying no drastic changes in consumer behaviour. Hence Z1P prices didn’t change significantly during and after covid. e) News of Z1P supposedly entering the US capital market in late 2020 had caused a high demand in its shares (Boyd, 2021). Due to a finite supply, share prices skyrocketed to $13.92 in Feb-2021.

Tony (Debt Specialist) Part A: a) The RBA bond yield curve is normal sloping, with the 2-year-yield rising from 0.65% to the 15-year-yield, at 2.14%, signalling economic expansion (RBA, 2021). I personally associated this to the strong investor sentiment towards ZIP in February. b) The recent interest rates have revealed that the RBA has retained cash rates at an alltime low of 0.1%. We can see the impact of interest rates on the stock price of Z1P near the beginning of the year in February, where the sudden drop of cash rate from 0.75% to 0.25% has also incited confidence amongst Z1P investors, as it signalled an increase in opportunities to finance operations and hence, maximising their future profits (Lowe, 2021). This has partially fueled the increase in stock price mid-February to its all time high of 13.92 (Factset, 2021). 2

c) ZipCo claims an addressable market of 5T in the US (ZipCo, 2021). However, the weakening of the US economy signified by the rise in corporate debt leverage, as well as increased borrowing costs is exhibited in the drop of ZIP stock price in June. d) Spending on debt consolidation services rose to 38% during COVID, however as overall consumerism had also decreased, the overall impact was minimised (ZipCo, 2021). e) In order to fund their ongoing financial operations, ZIP has issued 30m in Class B Notes. I believe that news of this initially sparked investor interest and partially drove the stock price up in mid 2019 from 1.19 to 3.26, cementing ZIP’s market presence (Factset, 2021).

Mohammed (Equity Specialist) Part A: a) Australia GDP for 2020 was USD$ 1330.9B (APH, 2021) and it is expected to grow by 5.1% in 2021 as the impact of Covid-19 dies out. The confidence has recovered, and labour demand is strong. This is a positive outlook for ZipCo possibly increasing EPS b) As of 03/11/2021 the cash rate is maintained at 10 basis points (0.1%). This means that the cost of burrowing is very low hence companies have a chance to increase their leverage for a very low cost. This can be seen with ZipCo where the company has a reasonable high D/E ratio of 2.18 (Factset, 2021) c) ZipCo acquired Twisto Payments on 11/11/2021 for A$140M as part of its European Expansion Strategy. They also acquired Spotii in Q3-CY21 for A$21M to expand into the Middle East. This dilution caused the share price to experience a mild dip (12/11/21) however the widespread international presence of ZipCo provides an opportunity for growth and long-term stability. d) FactSet gives ZipCo a Covid-19 impact score of 1% which is quite low, but it is in line with the scores of its competitors such as Square Inc with 1% and PayPoint with 2%. This is due to the surge of Zip customers shopping online during the pandemic. This factor contributed to the former all time high for Z1P.AX during Aug 20. e) ZipCo issued 17,454,987 new fully paid ordinary shares in the company Twisto at an issue price of A$6.61. It plans to issue 82,395 shares for Z1P.AX on 01/12/2021

Oscar (Foreign Exchange specialist) Part A: a) Recent RBA monetary policies have an emphasis on stimulating households and businesses whilst some international central banks in advanced economies have increased policy rates. To combat rising inflation expectations, both the Bank of England and the Federal Reserve system have tightened monetary policy to stabilise their economy. Implementation of these international fiscal policies parallel the announcements made by RBA, giving ZipCo the opportunity to diversify overseas whilst providing the stock price space to grow.

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b) UK cash rates are at 0.1%, whilst the US is 0.07% (Bloomberg, 2021). As international economies have adopted lower policies, ZipCo cannot easily liquidate their securities and are discouraged from pursuing more capital, deterring foreign investors by inadvertently stagnating the current share price. c) The incoming inflationary environment in Australia is reflected in economic forecasts overseas. As foreign central banks have issued transitory policies to accommodate for higher inflation, ZipCo may undergo an unexpected increase in stock volatility. I conclude that as BNPL companies do not have stable cash flows, they struggle in high interest rate economies. d) Support from international governments for consumers has seemingly mitigated the concerns put forward by the global pandemic. From this I have found that the performance of ZipCo has weathered the oncoming economic downturn by its strong online presence. e) ZipCo has agreed to invest in ZestMoney (Morningstar, 2021), an Indian BNPL operator in order to build an international BNPL network. ZipCo has also partnered with Microsoft to utilise better technology for shopping experiences in US markets.

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Part B: Zip Co Limited (Z1P.AX) is a leading global financial services company specialising in the ‘Buy Now, Pay Later’ scheme. By looking at the company through different financial lenses, we attempt to forecast the share price for the next 12 months. The capital structure of ZipCo comprises $2.25B in debt, and an equity portion of $1.03B (Factset, 2021). It is currently operating at a debt to equity ratio of 2.18 which is considered relatively high. However, we found this to be typical of companies in their early expansion stage, as they are more concerned with expanding and raising capital, rather than covering its debts and expenses. This is contrasted to its DE ratio of 5.31 in FY2020, signalling a reduction in its relative debt (Factset, 2021). An improvement in DE ratio within 1 year is indication that its expansion has been successful in generating cash to cover debts, which we believe could help alleviate investor doubts about Zip’s profitability in the future. Therefore we have decided ZipCo has generated a positive outlook regarding its overall financial health and its growth strategy. In spite of the reduction in the DE ratio, ZipCo issued over 30 million ordinary shares in November, as discussed in Part A, to support its expansion into the UK and the Middle East. This stock dilution will cause the share price to dip for the next month. Also, the share price is expected to drop even further considering its negative PE ratio of -4.63 (FactSet, 2021) meaning the company is losing money. This is, as mentioned above, typical when a company is focusing on expanding. The company’s EPS also dropped in 2021 going from -0.05 (Jun '20) to -1.28 (Jun ’21) (FactSet, 2021), further conveying that the stock price is going to fall in the next 12 months. We believe a constant dilution and unattractive financial ratios would create hesitancy in potential shareholders and existing shareholders looking to increase their equity.

This hesitancy of the investors is emphasised by the trend of inflation rates rising in Australia’s economy as noted by the 0.8% growth in CPI (FactSet, 2021).

Moreover, the Real GDP Actual 0.7% is greater than the estimated 0.4% (FactSet, 2021), this causes the economy to operate above its sustainable capacity and is again, likely to generate inflation. An interest rate boom is also to be expected due to the inflationary pressure (Lowe,

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2021); this impairs the profits and the integrity of ZIP because it makes its revenues from borrowing and lending.

Coupled with a 5.2% increase in the Unemployment rate (FactSet, 2021), investors are worried customers won’t be able to pay ZIP back, resulting in a shift to safer investments and causing ZIP prices to fall further. Now let's shift our focus onto the international scale. Various international geopolitical events such as Brexit in the UK has caused a heavy decline of the pound sterling (GBP) being projected to go down by 4.9% over the next 15 years (Ler, 2021). Also, the imminent possibility of ZipCo obtaining dual listings on both the ASX and NYSE produced fluctuations in stock performance - leading to a temporary increase in price. In the wake of Brexit, the collapse of the pound sterling exacerbated rising inflation levels (State Journal, 2021). We predict that firms may experience a fall in share performance due to lower valuations because of the inflationary environment. Due to the uncertainty of foreign exchange markets, a reduction in international revenues will further cause ZipCo prices to decrease. Therefore, through the analysis of these factors, we estimate that Z1P will decline to range between $4.65 (-18.6%) and $5.05 (-11.6%).

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assets.ctfassets.net. 2021. No page title. [ONLINE] Available at: https://assets.ctfassets.net/1u65qlkmktuw/6RImmOm8wCUToCkG8SxbyR/190b612aece ab4f3706343459aff398f/FINAL_____Zip_____Weekly_Spending_Index______July_Rep ort.pdf. [Accessed 19 November 2021]. assets.ctfassets.net. 2021. No page title. [ONLINE] Available at: https://assets.ctfassets.net/1u65qlkmktuw/6RImmOm8wCUToCkG8SxbyR/190b612aece ab4f3706343459aff398f/FINAL_____Zip_____Weekly_Spending_Index______July_Rep ort.pdf. [Accessed 19 November 2021]. Australian Financial Review. 2021. Zip Co goes shopping for US investors, mulls second listing. [ONLINE] Available at: https://www.afr.com/street-talk/zip-co-goes-shopping-forus-investors-mulls-second-listing-20210207-p5709i. [Accessed 19 November 2021]. FactSet. 2021. Z1P. [ONLINE] Available at: https://my.apps.factset.com/navigator/company-security/snapshot/Z1P-AU. [Accessed 17 November 2021]. Fiscal overview – Parliament of Australia . 2021. Fiscal overview – Parliament of Australia . [ONLINE] Available at: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Li brary/pubs/rp/BudgetReview202021/FiscalOverview. [Accessed 19 November 2021]. Reserve Bank of Australia. 2021. The International Environment | Statement on Monetary Policy – November 2021 | RBA. [ONLINE] Available at: https://www.rba.gov.au/publications/smp/2021/nov/the-international-environment.html. [Accessed 19 November 2021]. Reserve Bank of Australia. 2021. Monetary Policy | RBA. [ONLINE] Available at: https://www.rba.gov.au/monetary-policy/. [Accessed 19 November 2021]. The Motley Fool Australia. 2021. Here's what top brokers are saying about the Zip (ASX:Z1P) share price forecast. [ONLINE] Available at: https://www.fool.com.au/2021/11/18/heres-what-top-brokers-are-saying-about-the-zipasxz1p-share-price-forecast/. [Accessed 19 November 2021]. Reserve Bank of Australia. 2021. Cash Rate Target | RBA. [ONLINE] Available at: https://www.rba.gov.au/statistics/cash-rate/. [Accessed 19 November 2021]. Reserve Bank of Australia. 2021. Statement by Philip Lowe, Governor: Monetary Policy Decision | Media Releases | RBA. [ONLINE] Available at: https://www.rba.gov.au/mediareleases/2021/mr-21-24.html. [Accessed 19 November 2021]. Request Rejected. 2021. Request Rejected. [ONLINE] Available at: https://www.fiig.com.au/debt-issuers/debt-capital-markets/case-studies/zip-co-ltd. [Accessed 19 November 2021]. The State Journal. 2021. How currencies affect stock prices. [ONLINE] Available at: https://www.state-journal.com/sponsored/how-currencies-affect-stockprices/article_9216b1a2-d9a5-11eb-9ce9-ff6e2d22986a.html. [Accessed 17 November 2021].

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ZipCo. 2021. Investor Relations | ZipCo. [ONLINE] Available at: https://zip.co/investors/. [Accessed 19 November 2021]. Zip Co Ltd (Z1P) Quote - XASX | Morningstar. 2021. Zip Co Ltd (Z1P) Quote - XASX | Morningstar. [ONLINE] Available at: https://www.morningstar.com/stocks/xasx/z1p/quote. [Accessed 19 November 2021].

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