OzForex: Money Market Growth Potential

This story features OFX GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: OFX

-Well placed to grow strongly
-Partnering with key brands
-Established in a highly regulated market
 

By Eva Brocklehurst

Newly listed OzForex Group ((OFX)) has hit the ground running. Brokers are attracted to the medium-term growth profile as well as a strong balance sheet. The company engages in online payment services and international money transfer. This is a market that is growing rapidly and the size of the payments are increasing because of increased trade, foreign investment and cross-border movement of individuals. Online commerce is becoming sophisticated, and companies and individuals are attracted to the ability to assess the competitiveness of the options they have – online.

Macquarie recently initiated coverage on the stock with an Outperform rating and target of $2.80, noting OzForex shares a number of similarities with other online businesses that have gained significant market share through a focus on efficient and lower-cost service. The stock has performed strongly since it listed earlier this year and while the broker concedes the near-term multiples are demanding there's' still further upside potential, because of the numerous opportunities both domestically and internationally. Macquarie suspects the growth in demand for online payment services will outstrip the growth in the overall market.

Goldman Sachs retains a Neutral rating as the broker, while liking the growth aspect and high returns, thinks the stock is fully valued, trading on FY15 value/earnings of 18.3 times. Despite this, Goldman notes the online penetration of international money transfer services is very low, particularly among ordinary consumers, which represent 67% of OzForex's sales. The broker compares this with the fact that long-established money transfer company, Western Union, takes only 4% of revenue from online channels. So OzForex is offering alternatives to the banks and that is a key catalyst for the brokers. OzForex is now licensed to operate in 32 US states and hopes to add Singapore to its licences in the next few month.

Macquarie expects the global expansion will continue at high rates, having recently entered markets such as the US in 2012 and Hong Kong in 2011. Macquarie also observes that OzForex has also recently developed a solution for partners requiring international payment capabilities within existing service or software operations. Whilst currently an immaterial contributor to revenues, there are a large number of potential partners that would benefit from this service that could be added to this channel in the next few years.

OzForex acquires clients and converts registered clients into dealing clients. The company's revenue growth mirrors the number of client deals, value and the margin on those deals. The key driver of these deals is the number of registrations and the conversion rates. Partnering with brands such as ING, Travelex and MoneyGram means the company has instant access to a large existing client base. The partner brands the site and has access to the OzForex functionality, while OzForex owns the client and has the direct contact with them.

OzForex is supported by a high proportion of recurring revenue, high margins and strong free cash flow and remains confident of achieving prospectus forecasts. Its growth outlook, operational and financial characteristics are such that Macquarie thinks it should command a significant premium to the broader market. OzForex may not have the same dominant domestic competitive position as an REA Group ((REA)), Seek ((SEK)) or Carsales ((CRZ)), but what these companies lack is a strong international footprint which provides the significant global growth opportunity.

What's the competition like? There are a number of internationally listed companies that provide international payment solutions. Macquarie notes, for the majority, the international payment function is only a small part of the business. Either that, or they conduct their operations through a traditional network. Hence, comparatives are hard to find. For the brokers, the risks are with the potential for increased competition from existing providers and the potential for new entrants to the market. The international payments system is highly regulated so this is both a risk and a barrier to entry.
 

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