OzForex Potential Continues to Attract Interest

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

-Structural advantage in online FX
-Near-term expansion limited
-Robust profitability
 

By Eva Brocklehurst

OzForex Group ((OFX)) continues to attract attention. When FNArena reviewed the stock after its listing late last year the outlook was favourable. Brokers liked the fact the online payment and international money transfer service offered alternatives to the banks.

Moelis has now joined the ranks of brokers covering the stock, believing that while there's little scope for expansion near term, the company has structural advantages – online versus bricks and mortar – which should stand it in good stead against banking competitors. The broker has a Hold rating but is confident that earnings will accelerate in FY15. Moelis has a price target of $3.50. This compares with Macquarie's Outperform rating and $2.80 price target. Macquarie concedes near-term multiplies are demanding but expects further upside because of the numerous opportunities in front of the company. 

For Moelis, the key competitive advantage is the pricing of exchange rates and the ease with which customers can use the website. OzForex does rely on relationships with banks for local accounts and hedging, which may provoke tensions as it takes market share. The risk of a price war is well into the future, in Moelis' view, given the comfortable position of the banks. OzForex specialises in international funds transfers, directly to retail clients and third party partners. Given the robust profitability of each foreign currency transaction to domestic banks, the broker considers OzForex can increase market share by a considerable degree before major banking competitors attempt to hold market share by lowering prices.

The company is subject to considerable regulatory, financial and technological risk but the track record of the current management team suggests to Moelis that risks are being controlled as much as possible. The primary risk relates to the offered exchange rates and hedging which may not provide sufficient spread if there is currency volatility during the transfer and settlement process. Moelis argues that growth in transactions should help to lower spread risks given an improved ability to match daily client orders.

OzForex revealed a 44% increase in net fee income and 13% increase in net profit in the first half results, reported in November as the company has a March year end. Active clients increased to 107,000, a 29% increase. Moelis expects the company to achieve 20% earnings growth for the next few years, with the ramping up of transaction volumes. Long-term growth is also considered considerable, given the size of the AUD/USD turnover and scope to replicate this across other currency pairs.

The company occupies a niche in the medium sized transfers between bank accounts in different countries. The majority of revenue is generated in Australia and New Zealand (55%) followed by Europe with 21% and North America with 9%. The top 10 currency pairs account for two thirds of the transaction turnover. Moelis notes this leads to the situation whereby a strengthening of the Australian dollar against other currencies poses downside risk to revenue, because of the lower transaction value in AUD needed to purchase the same amount of offshore currency.

The business was founded in 1998 as an Australian-based provider of foreign exchange information and commenced offering international payment services in 2003. Offices are located in Sydney, Auckland, Toronto, San Francisco, London, Singapore and Hong Kong. The business operates in 32 US states.

See also, OzForex: Money Market Growth Potential on November 25 2013.
 

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