Ozforex Group Ltd (ASX: OFX) 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 active clients, more than 140,000, 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.
While I understand that the company recently announced the appointment of a new Chief Executive Officer and Managing Director, Richard Kimber, here are seven reasons why OzForex is a buy today.
1. Strong profit growth
OzForex grew client numbers and earnings strongly during fiscal 2015. The company's net profit after tax was up 21% to $24.3 million, but more importantly, its new client numbers continue to grow. OzForex now has 18% more active clients than a year ago, that means 142,500 active clients are driving a 25% increase in fee and commission income.
2. Long runway
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. While Ozforex has a relatively low market share in Australia and the U.K., recent investments will help grow its presence in the much larger U.S. market, providing it with a long growth runway.
3. Low cost competitive advantage
OzForex offers a simple and efficient method for exchanging currency at a fraction of the cost of traditional providers. This presents an attractive alternative and user friendly interface for customers, and a low cost competitive advantage. Proof of this is the 20,000 new users using OzForex each year.
4. Zero debt
OzForex currently has no debt and $168 million in cash on its balance sheet. Its debt to equity ratio is negative.
5. High return on equity
OzForex's return on equity (ROE) has consistently averaged 62% since 2011. In 2015, the company generated an ROE of around 58%, while having no debt. High ROE with low debt is one of the most important financial ratios when looking at stocks to buy.
6. Strong cash flows
Since its inception, OzForex has generated $161 million in 'cash flow from its operations'.
Because of its low cost business model, the company has only spent $8 million in 'cash flow from investing', leaving it with a whopping $153 million after investing.
Even after the company paid $76 million in dividends it still had $78 million in positive cash flow after factoring in foreign exchange effects.
7. Undervalued Price
OzForex is currently priced at $2.04, which is close to the bottom of its 52-week range. Its price has fallen by 23% in the past 12 months, compared to the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), which has risen just 2.75%. Its P/E is around 20. For me, the share price is currently undervalued and that's why I believe now is the time to buy.
