OzForex Takes On The World

This story features OFX GROUP LIMITED. For more info SHARE ANALYSIS: OFX

-3-year target to double revenue
-Expanding brand offshore
-Undemanding valuation
 

By Eva Brocklehurst

Money transfer business, OzForex Group ((OFX)), has a reinvigorated strategy, intent on growing earnings at a substantially faster rate over FY16-19.

At its annual general meeting the company's new CEO, Richard Kimber, outlined a target to double revenue, with a focus on three areas: increased penetration in Australia, growth overseas, particularly in the US, and taking advantage of opportunities in adjacent segments such as wholesale, mobile and lower value payments.

Execution becomes the critical factor now the case for accelerated growth has been outlined, in Deutsche Bank's view. Uncertainty around the cost base to support this advance in top line growth was addressed to some extent in the presentation, with the broker noting the extra operating and capital investment. Revenue is expected to grow faster than expenses, implying margin expansion.

To achieve on its plans the company will invest $20m over FY17-18. OzForex is a small player in Australia and will undertake a marketing push to promote its brand. To increase penetration in other currencies, particularly the US dollar, the company will take advantage of its position in the US for high value transfers and capitalise on a very large market for immigrants and international students. The company will re-brand its operations under one common global banner, OFX.

Deutsche Bank increases forecasts by around 4-6% for FY16-18 and assumes margins will be flat until FY18. The broker believes a discounted cash flow valuation is the best means of capturing the high cash flow generation and growth potential and a Buy rating and $2.95 target are maintained.

OzForex currently generates 11% of revenue from wholesale activities where management believes there is a strong opportunity to grow by creating more flexible options. Traction is expected to come from the upgraded mobile application.

OzForex will also not neglect lower-value transfers, instead targeting a full service to existing customers who wish to conduct transfers lower than the minimum advertised transaction size of $1,000. Currently around 12% of transactions are below this level and in the past the company has often pushed customers towards competitors.

The goal is bold, Goldman Sachs observes. FY16 has begun well and, while the company is performing ahead of the broker's forecasts, higher costs are reducing medium-term earnings expectations by 6-7%. Forecasts have been slightly upgraded beyond FY20.

With regard to the company's goal of doubling revenue and earnings beyond FY16, the broker assumes revenue grows 62% and earnings 81% over the FY16-19 timeframe. Goldman Sachs, not one of the eight stockbrokers monitored daily by FNArena, has a Buy rating and $3.11 target.

The business is high quality, in Macquarie's opinion. It may be a relatively small company operating in a large market but the decision to ramp up its investment and pursue growth is the right one, the broker asserts. Nevertheless, Macquarie assumes it will take time for initiatives to gain traction and expects margin declines are likely in FY17 before the leverage is evident in FY18.

Execution and delivery are key to the success of the strategy and the outcome unknown but Macquarie points out that these sorts of high growth opportunities are relatively rare. Moreover, the stock's current valuation is not demanding and an Outperform rating and $2.70 target are retained.

The company's re-branding plans are also not without risk. Macquarie notes there potential to lose goodwill in established market, particularly in Australia where a large share of traffic is generated organically. On the other hand, the online payment and international money transfer market remains dominated by the banks, which continue to charge margins well above those of OzForex.

Industry consolidation continues to feature, Macquarie observes, with the international payments sector still relatively immature and scale benefits can be realised. Smaller participants are also feeling the pinch from increasing regulatory requirements.

The broker suspects weakness in the Australian dollar has increased the stock's appeal as a target for offshore market participants. In terms of the company's acquisition plans Macquarie expects these would be more likely to be offshore or in complementary technologies.
 

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