OzForex: Opportunities Outweigh Costs

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

-Cost growth contains margins
-AUD volatility contributes to costs
-Wholesale market potential
 

By Eva Brocklehurst

Online payment and international money transfer company, OzForex Group ((OFX)), remains well placed to capture growth opportunities but the FY15 results were impacted by cost inflation that was above expectations. Part of the cost growth in the second half was non-recurring and part was a re-basing of staffing costs, as incentive plans are put in place to retain key staff members. Another part was online marketing cost inflation.

The increase in currency volatility has had an impact on volumes. Specifically, the weaker Australian dollar contributed to an increase in average transaction size and turnover, although it also drove lower yields and raised costs. While the increased costs were the likely instigator of the negative share price reaction, Macquarie estimates around half of the increase can be attributed to the lower Australian dollar. The increase in employee expenses was flagged, but the broker considers this reflects an investment in capability to support US growth initiatives.

No specific guidance was provided and the broker assumes a slowing of customer growth rates in FY16 from the levels seen in the second half of FY15. The new CEO, Richard Kimber, is expected to update on the strategic direction at the company's AGM with Macquarie anticipating further information on branding and growth initiatives. The broker has an Outperform rating and $2.70 target.

Deutsche Bank was disappointed with the margins because of higher operating expenditure and expects further margin deterioration on the back of continued cost investment, which the broker argues should have been made before the IPO in late 2013. Notwithstanding a cost-driven earnings downgrade of 4-8% for FY16-18 and near-term uncertainty until the CEO provides an update, Deutsche Bank remains attracted to the business model, with a Buy rating and $2.75 target in place. The broker notes the company does expect FY16 earnings will be above FY15, and even better if market conditions improve.

Goldman Sachs raises sales forecasts by 2-3%, driven by increased transaction sizes, but cuts earnings estimates by 8-9% on higher staff retention and marketing costs. Sales are strong and underpin the long-term structural growth opportunity and Goldman Sachs also considers much of the current cost inflation is a re-basing exercise, as opposed to a structural one, besides the marketing outlays. The broker continues to believe the stock is one of the cheaper small-medium cap growth stocks and retains a Buy rating. Target is $3.13.

Cost growth will continue to contain margins in FY16 but most of the investments in IT, brand and mobile functionality have been sunk, in Goldman Sachs' view. Key drivers of the stock will therefore be the pace of online migration, as penetration of international money transfer services is very low, particularly among consumers.

Brokers envisage opportunities exist in online penetration, geographic expansion and the wholesale business. Management has signalled it will look to build a US wholesale sales team. Macquarie notes wholesale revenues are building and present opportunities, although they have taken longer to crystallise than first expected.

Australasia is expected to be the largest contributor to FY16 earnings, with consistent growth in active clients, partially offset by the full-year impact of public company costs. Europe is competitive so the company expects growth in active clients will be more challenging. North America should become more important to the active client base and Asia is likely to be in line, based on a highly competitive Hong Kong market and regulatory burdens in Singapore. Macquarie notes the longer clients can be retained, the more their lifetime value increases, given the costs associated with bringing new clients on board.

Macquarie and Deutsche Bank are the only FNArena database brokers covering the stock.
 

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