Company Overview – OzForex provides low cost foreign exchange and online international payment services for consumer and business clients. The majority of income is generated by taking a spread on the exchange rates and for smaller transactions charging a transaction fee. OzForex’s 100,000 active clients largely transact through one of its seven regionally branded websites, but the firm also offers a white label product with profit sharing agreements. Originating in Australia and New Zealand it has expanded into Europe and North America.

Analysis – The firm has built an efficient transaction platform, a network of bank accounts in key markets around the world, regulatory licenses in numerous countries and states and now has more than 100,000 active users. While OzForex has built an attractive business, the scale of operations is relatively small in the context of foreign exchange markets and being a fairly new business there is lack of historical evidence showing sufficient entry barriers to prevent new entrants from replicating its business model. However OzForex continues to grow and its competitive strengths will firm, with a large customer base helping build goodwill and cost advantages.


OFX Global Footprint (Source - Company Reports)

The international payment services market is a large market that is growing rapidly with the increase in international trade and migration. Online and mobile international payment services are experiencing particularly rapid growth as the global population increasingly accesses financial products and services online. Foreign exchange has been one of the last services to evolve and move online. It is now rapidly being adopted as increasingly sophisticated clients are recognizing that traditional /offline international payments services are costly and inefficient. We expect online providers such as OzForex will continue to increase their share of this growing market with their offer typically far more compelling than those of incumbent service providers.


1H14 Fee & Commission Income (Source - company Reports)

In our view OzForex shares a number of similarities with other successful online businesses that have managed to attract significant market shares from entrenched incumbents. The business was started and remains a largely online offer. The business model and operating platform were developed from day one to best fit the business requirements to be successful in the online channel. The model is highly scalable and with its low cost operating structure, OzForex can offer clients not only a better service but a lower price than currently offered by incumbents. OzForex has no legacy revenue streams, margins or overheads that need to be recovered or management’s mindsets that need to be altered. We think that OzForex is very well positioned to continue to attract clients and disrupt competitors in its segments of the international payments market.


Active Clients (Source - Company Reports)

Within the online segment of the international payments market, OzForex has developed a unique proprietary platform and a collection of capabilities over the last 15 years that we believe would now be difficult for both existing competitors and new entrants to replicate. OzForex has a strong track record of delivering strong revenue and earnings growth. Revenue growth is a function of the number of client deals, their value and the margin or yield on those margins. OzForex is continually improving its SEO/SEM marketing campaigns and enhancing the platform to improve the client experience and increase conversion rates. For example Ozforex is currently expanding the functionality of mobile/tablet apps and introducing new payment methods.


NPAT + EBTDA (Source - Company Reports)

We expect OzForex will continue to expand globally. The company is well positioned to grow at higher rates of growth in recently entered markets such as the US (2012) and Hong Kong (2011). The company is currently building on its existing presence in these key markets. The provision of international payment solutions to third parties through white label offerings is a very attractive growth option for the group. These revenue share opportunities involve little upfront investment or expenditure and provide OzForex with the opportunity to leverage other well-known brands to gain instant access to large active client bases.


Transactions + Turnover (Source - Company Reports)

We believe this is a business in its infancy and well placed to participate in a revolution in the way consumers and small business exchange currency. Although operating in Australia for more than 10 years, OzForex has started from scratch in building an alternative to the banks and while still is little known, year on year take up continues to build momentum. Still only commanding a small piece of the market it competes for in Australia, we see no reason Why its share of the market cannot triple from roughly 5% to 15% during the next 10 years. The firm has even smaller market share in other countries giving it ample room to grow. The potential for greater than expected adoption of the OzForex services either directly or through new white label creates uncertainty to the upside.


OFX Daily Chart (Source - Company Reports)

OzForex focuses on medium sized transfers between bank accounts in various countries, with an average transaction of AUD 14,000 for consumer clients and AUD 29,000 for business. Consumer clients typically use OzForex for making mortgage payments in another country, investing abroad, international travel and paying rent and tuition for international students. Business clients use its services to pay foreign currency invoices, international payroll, accept payment from overseas consumers and businesses or hedge their foreign exchange positions. We expect these services to continue supporting demand for OzForex’s service, underpinned by growing adoption of the internet services and the increasing integration of global economies. Having operations in Australia, Canada, the U.S, the U.K, Hong Kong and New Zealand, OzForex can provide customer support 24 hours a day and has the capability to net off transactions between customers without accessing foreign exchange markets.



For the 1^st Half 14 Net operating income was up by 41.8% to $35.1m in 1H14, compared to 1H13. Active clients are in line with the company forecast at 107,000 for 6 months 1H14. Growth was driven by ongoing roll-out in the US and ramp up in Travelex Branded partnership arrangements in Australia and New Zealand. Client growth is delivering ongoing momentum in transaction turnover – increased to 6.6 billion for 1H14. Balance sheet remains robust with strong cash flow generation and no gearing. Overall market opportunity for OzForex’s continued growth remains very attractive. OzForex is on track to meet its FY14 company forecasts.
 
 
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. While we remain confident that the use of online payments will grow, banks will continue to charge high fees to a large group of consumers who are either uninformed, willing to pay more for the greater comfort of dealing with their bank, or just time poor. We believe this leaves a large market for OzForex to penetrate. Banks could replicate the online only model under a different brand, but this risks cannibalizing their traditional, very lucrative foreign exchange operations. As such the banks would be unlikely to promote this low cost alternative. Banks will also remain handicapped by regulations requiring them to use correspondent banks for international money settlement, delaying transaction settlement. OzForex settles within 24 hours, while the major banks take 2 or 5 business days. We like the OzForex story and would be putting a BUY at the current price of $2.91.

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