Ozforex Reiterates Ambitious Growth Targets

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

-Temporary slowdown in client growth
-Margins to narrow in first half FY17
-Balance sheet still solid
 

By Eva Brocklehurst

At is FY16 results Ozforex ((OFX)) reiterated its ambitious targets, expecting growth in FY15 revenue to double to $200m by FY19. Results were in line with downwardly revised guidance, suggesting earnings of $36.1m. The company had flagged a slowdown in active client and revenue growth in the second half, as a result of disruptions from re-branding initiatives and the website changes.

FY17 guidance is for earnings to be up on FY16. Margins are expected to narrow in the first half from increased marketing expenses before improving in the second half.

Deutsche Bank likes the company's cash generation and ability to scale up the model globally and observes the growth profile for earnings is accelerating, despite the short term looking slightly soft. The roll-out of the global brand will continue, but there should be less impact on client acquisition compared with the experience in Australia, given the relative brand strength and improving website performance.

Quality in the results was affected by higher development capitalisation compared with the broker's estimates while operating expenditure was also higher than expected in order to re-build the executive team.

Cash conversion was weaker, at 76% compared with the prior corresponding period's 146%, affected largely by timing. The balance sheet remains solid, in Deutsche Bank's view, and a Buy rating and $2.70 target are maintained.

There was little in the result to change Macquarie's view that FY16 was a year of transition, while new strategies were implemented. High depreciation and tax were the main differences with the broker's forecasts. Macquarie continues to believe the move to one global brand is the correct long-term decision.

The broker asserts the company's performance at the start of the year was compounded by events outside of its control. Active client and revenue growth slowed sharply, exacerbated by reduced volatility in euro currencies. Macquarie assumes increased marketing investment will gain traction but concedes this is a key risk to forecasts.

Active clients at the end of FY16 were up 6.0% while transactions increased 12%. This growth in transactions was greater, as it reflects increasing numbers of corporate clients which transact 4.5 times that of individuals. Corporate clients now represent 12% of active clients, up from 10% in FY14.

As a result, Macquarie was a little surprised that the average transaction size increased 5.0% and was down slightly in the second half versus the first. The broker expects a modest reduction in first half earnings which, with higher depreciation, would result in a fall in profit of 10%. A return to growth in the second half is expected. Revenues should benefit from the launch of weekend and lower value trading, the broker maintains.

FY17 is expected to be the first year of a significant step up in investment. While growth targets appear ambitious, current valuations are not factoring in a high probability these are achieved and Macquarie observes there is no significant corporate premium in the share price. This suggests potential upside from current levels and the broker retains an Outperform rating and $2.60 target.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms