Company Overview - OzForex Group Limited (OzForex) is a provider of online international payment services for consumer and business clients. The Company offers its corporate clients exchange rates, fee-free dealing and great 24-hour service. The OzForex platform powers international money transfer services of ING Direct, Macquarie International Money Transfers, Travelex International Payments and Moneygram Money Transfers. The OzForex Travel Card provides members and customers with an access to their money worldwide. The Company has relationships with some of the banks, which include Barclays, UBS, Bank of New York Mellon, Bank of America and Westpac. Barclays provides OzForex with foreign exchange dealing facilities and banking services within the United Kingdom. UBS provides OzForex with foreign exchange dealing facilities and banking services.

Analysis – A first quarter fiscal 2015 trading update highlighted another strong period of growth for OzForex with 13,764 new clients, taking total active clients up 3.6% from the fourth quarter to 124,500. Transaction numbers and transaction volume also increased strongly. While good, growth was a little softer than expected and follows market disappointment of the fiscal 2014 result. Predicting periodic customer number is difficult so while slightly disappointing we retain our view that over the ;long term  OzForex can build on its low market share in Australia and on the back of recent investment build a presence in much larger U.S market.



Financial Highlights (Source - Company Reports)

In new way to leverage its platform and drive transaction volumes, OzForex also announced an agreement to provide money transfers for customers of accounting software form Saasu. While in isolation not material it adds confidence in both OzForex’s technology and the opportunities for additional partnerships. OzForex is a disrupter in the foreign exchange market, utilizing a low cost online business model to offer lower fees than large financial institutions that dominate the space.
There is potential for faster and greater than expected take up of the OzForex services. Despite the cost saving and the convenience benefits, consumer behavior can be difficult to predict. Market adoption will drive more users through OzForex websites and increases opportunities to act as a white label provider or strategic partner.


New Dealing Clients (Source - Company Reports)

We believe OzForex’s proven platform, established bank relationships and regulatory licenses will see it to continue to grow market share. Details of the arrangement with Saasu are yet to be finalized but OzForex will build a capability that enables users to make international payments through either their bank or through the OzForex platform. The interface for connecting with OzForex may be different, but the procedure will be the same as any other, OzForex receives client money than makes the payment in the exchanged currency. With the majority of clients based in Australia and the U.K, Saasu is a small accounting software provider but the agreement could open the door to more deals with even larger accounting software businesses. Commercial details have yet to be released but we assume some sort revenue sharing agreement similar to white label offerings.


Forex Turnover (Source - Company Reports)

OZForex’s young and attractive business model of providing low cost and user friendly foreign exchange and international payments service online is attracting in excess of 20,000 new users a year. While its offering is not unique the efficiency of its platform and success in promotional activities, alliance agreements and white labeling of its platform has seen the firm quickly leverage a low cost base and make attractive returns on invested capital. As OzForex continues growing its competitive strengths will firm, with a large customer base helping build goodwill and cost advantages.


Active Clients (Source - Company Reports)

OzForex earns income by charging clients a small spread, varying with the size of the transaction, on the interbank cash rate for exchanging currency. External fees involved in executing transactions and hedging for currency risk are extremely low resulting in high gross margins. With a large number of transactions made online, very little human interaction is needed, allowing OzForex to also make attractive earnings margins.  With a high proportion of fixed costs, the business is highly scalable and should benefit from rising margins as revenue builds.


First Quarter Performance (Source - Company Reports)

OzForex has a business model we like. With low capital intensity and high profit margins, the firm is able to generate strong returns on invested capital. We believe it is a good quality company with strong growth potential which should build on its first mover advantage in Australia to strengthen competitive advantages over time. All considered OzForex is an attractive growth stock. We forecast average revenue growth of 17.5% per annum in the next five years, driven by ongoing promotional activity   and word of mouth attracting new users, traction in the U.S market after setting up in 2012, additional white labeling contracts and additional services such as travel cards. We assume active client numbers in North America will eventually reach current Australian levels. While not its home market this appears achievable given the market is estimated to be four or five times larger than Australia.


US License Footprint (Source - Company Reports)

External fees involved in executing transactions and hedging for currency risk are extremely low, resulting in a net fee income/income before hedging and transacting costs ratio 94%.  Staff spread across customer service, information technology and compliance are scalable, meaning increases in fee income only require a minor increase in staff. This operating leverage underpins our expectation for strong profit growth of 22% per annum during the next five years. In its current growth phase we don’t expect promotional spend to decline but earnings average will still average an attractive 35% and reach 40% by fiscal 2019.


OFX Daily Chart (Source - Company Reports)

We do not expect downward pressure on fees in the next five years, given OzForex’s already attractive value proposition. In the longer term we assume increased competition as the market for online transaction grows, pushing OzForex’s average fee margin down from 60 to 50 basis points. Competition among existing players is material. OzForex competes head on with other discount online foreign exchange providers with similar business models and focus on building global reach and transaction volumes. Large financial intuitions such as banks and Western Union are unlikely to try to compete on price in the near foreseeable future but they remain a threat to OzForex’s long term growth aspirations. Given most Australian banks currently earn a spread three to four times that of OzForex per transaction it is not in their best interest to compete on price and sacrifice massive profits unless online competitors build much larger market share which is unlikely in the foreseeable future.

First quarter 2015 operating income and EBITDA both increased 15%, NPAT 9% against a strong previous corresponding period. While 1H15 is shaping as softer than initially forecast after a strong 2H15 OFX is ahead YTD and 12 months September 15 forecasts were reiterated and appear achievable. We believe this current period of weakness presents an opportunity to acquire a high quality business with substantial medium term growth opportunities in both domestic and international markets. We reiterate our BUY on the stock at the current price of $2.44.

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