EUR 850.00 For Business Accounts Only

Morningstar | OFX Updated Star Rating from 20 Nov 2018

Higher operating expenses than expected in first-half fiscal 2019, focused primarily on increasing employee headcount and promotional activity, results in a reduction in our forecast fiscal 2019 underlying net profit after tax, or NPAT, for no-moat OFX Group to AUD 21.1 million from AUD 22.8 million. However, this has not resulted in a material change in our longer-term outlook for the business and our fair value estimate remains at AUD 1.80 per share. New management has continued the company’s turnaround from its poor operating performance of the last few years, and we expect this momentum to persist in the second half of fiscal 2019. Nevertheless, we believe the stock is moderately overvalued at current prices. At our fair value, the stock has a fiscal 2019 P/E of 20.3 times, and a fully-franked dividend yield of 3.5%.

While active client growth was disappointingly down 0.8% for the half, we nevertheless expect active clients to grow by 2.5% in fiscal 2019. Management indicate overall active client growth was lower due to a fall in consumer active clients in the United Kingdom because of a shift in marketing from the U.K. to North America. Active clients did grow in North America, Asia and in its corporate segment, but not enough to offset the lower active client growth in the U.K. and Australia. Management also indicate overall active client growth in Australia was impacted by the company entering a new international payment solutions relationship with an undisclosed wholesale client in the half. We believe the increased investments the company has made during the half in head-count, promotions and technology to improve the customer experience should generate stronger active client growth in the second half.

Other fundamentals were stronger. Transactions per active clients were up 13.6% and in line with our expectations and average transactions per client of AUD 23,200 was higher than our expected AUD 22,300.

These strong fundamentals compensated for the lower active client growth and pleasingly helped the company generate broad double-digit revenue growth across all regions. There was particularly strong revenue growth in Asia of 29%, and North America of 18%, compared with the previous corresponding half. OFX’s core Australian and New Zealand business also experienced revenue growth of 11% and its European business grew by 13%.

However, underlying NPAT was lower than we had forecast because of the company’s stepped-up operating expenses, although we expect these efforts to drive improved top-line results. As an example, employee costs increased by 13% due to an increase in headcount, but this includes growing sales people, which should drive top-line growth particularly in its corporate segment. Similarly, OFX also increased promotional expenses by 21.8% compared with the previous corresponding half, which should also help it drive active client growth. While these expenses were higher than we expected, they should assist the company to generate higher earnings in the second half and beyond. Furthermore, despite the higher operating expenses, the company continued to confirm its commitment to positive operating leverage (revenue growing faster than operating expenses excluding nonrecurring items), which we forecast to be 0.4% in fiscal 2019.

The company’s commitment to generating future earnings growth was also reflected by higher capital expenditures during the half. Capital expenditures were almost double the previous corresponding period at AUD 4.1 million. These investments were focused on its website, mobile applications, and its global currency account, all aimed at improving the customer experience. Notwithstanding these investments, the company continues to maintain a strong balance sheet with no external debt.

There had been some media speculation that OFX was considering inorganically boosting its expansion into Europe and the U.K. by acquiring Currencies Direct. Currencies Direct was acquired by private equity for about GBP 200 million in 2015. Currencies Direct is another foreign exchange and payments solution company that competes with OFX for high net worth clients and small to medium enterprises. This would be a material acquisition for OFX. However, while OFX confirmed it had been in discussions with Currencies Direct, it now indicates these discussions are no longer continuing.