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Morningstar | OFX’s FY19 Earnings and FVE Raised on Good Operating Momentum and Lower Australian Dollar

Positive earnings momentum, our continuing confidence in new management’s multipronged growth strategy, and the recent depreciation of the Australian dollar against major currencies such as the U.S. dollar, British pound, and euro prompt an increase in no-moat OFX Group’s underlying net profit after tax and fair value estimate. We increase the company’s fiscal 2019 underlying NPAT to AUD 22.8 million from the previous AUD 21.1 million and increase our fair value estimate by 6% to AUD 1.80 per share from AUD 1.70. At our fair value estimate, the stock trades on a fiscal 2019 P/E of 19 times and a fully franked dividend yield of 3.7%. However, at current prices we view shares as overvalued.

We forecast 11.4% growth in net operating income, or NOI, in fiscal 2019 from our previous forecast of 7.2% growth, versus 4.6% growth in fiscal 2018. Our continued confidence in new management’s ability to turn around the poor earnings performance of the past few years was reaffirmed by OFX achieving its highest ever quarterly NOI in first-quarter fiscal 2019. NOI was 13% higher than in first-quarter fiscal 2018, continuing the NOI growth momentum from second-half fiscal 2018. This also represents four consecutive quarters of NOI growth relative to the prior corresponding period, with NOI growing by 9.5% in second-quarter fiscal 2018, 7.1% in third-quarter fiscal 2018, and 11.5% in fourth-quarter fiscal 2018.

Our expected strong NOI growth in fiscal 2019 translates into even stronger underlying NPAT growth through the benefit of operating leverage. We forecast underlying NPAT to grow by 21.4% in fiscal 2019 from 12.5% previously. One of the reasons for our confidence in new management is that it has increased NOI while maintaining cost discipline, with management indicating that the company is on track for positive operating leverage (NOI growing faster than operating expenses) in fiscal 2019. However, strong earnings growth now appears reflected in the share price.

Our higher forecast NOI growth primarily stems from higher expected transactions per active client and moderately higher average transaction value per client. We expect strong corporate active client growth to translate into higher transactions per active client, with corporate clients transacting more frequently than consumer clients. We also expect that average transaction values per client in Australian-dollar terms increased in recent months, owing to the lower Australian dollar against major currencies such as the U.S. dollar, British pound, and euro.

However, we also continue to forecast margin pressures from fierce competition in a fragmented cross-border market for low-cost foreign exchange providers. This is one of the reasons for OFX’s high uncertainty rating, with continued strong earnings growth required to demonstrate it's competing effectively and to justify its current share price. Nevertheless, given the company’s relatively high average transaction values of about AUD 22,000, it is not only low costs that customers are concerned with; they also need confidence that the provider will make the foreign exchange payments as well as requiring a level of personal service if problems arise. It’s the combination of the company’s strong service levels reflected by high net promoter scores, its low-cost offering, its large addressable market (which OFX estimates at AUD 60 billion in revenue), and improved execution of its strategy by new management that provide us with confidence that the company can continue generating strong earnings growth in a competitive market.