Shares in international money transfer business OFX Group Ltd (ASX: OFX) crashed 18% today after the group updated the market to expect a flat second half to its financial year 2017.
The group is now forecasting full year net profit of at least $19 million and EBDTA of $27.5 million to $28.5 million, compared to EBDTA excluding substantial one off costs of $36.1 million in FY16.
The group also announced that its chief executive Richard Kimber would leave the business immediately after just 19 months in the role in another sign of the revolving door of senior staff at the company that I have previously warned should be a red flag for investors.
OFX blamed part of the downgrade on a post-Brexit fall in GBP and lower-than-expected revenues in Australia, although I have warned before that the group may be facing more underlying problems.
In October 2016 I outlined 6 reasons to avoid OFX Group shares that included:
- Business model (more on this and its relation to high senior staff turnover below)
- Insiders in heavy IPO sell down
- Macquarie dumped its holding
- Western Union got cold feet (see business model)
- Competition
- Valuation
Make sure you really understand the OFX business model
The very high turnover of senior staff since the business listed is important to note as much of its historical profit growth was driven by a business model reliant on a conflicted remuneration structure that's operation is disclosed on page 2 of its financial services guide (FSG), available on its website.
Although the penny still hasn't dropped with some of the analyst community over the business model, I expect it eventually will and remain of the belief that this company went to IPO (and the insiders largely sold) at the time it did due to the potential for The Future of Financial Advice Reforms (FOFA) to ban conflicted remuneration on general advice over FX.
Although the company has been able to retain the remuneration structure due to the watering down of the proposed FOFA reforms the fact that a lot of its pre-IPO senior management have left the business means the group is transitioning its profit-making emphasis away from this business model anyway.
As can be seen between 2014 and 2016 gross turnover has grown faster than net operating income and I would continue to suggest investors make sure they are aware of how the high staff turnover and historical business model is affecting the performance of this business.
Essentially in my opinion OFX is a different business now to what it was pre-IPO and this is largely due to the high staff turnover and its consequences on operational performance.
In fairness, OFX Group is far from the worst investment on the ASX and does have some attractive qualities like a strong balance sheet, scalability, and the potential to keep stealing market share from the banks.
Still I'm not buyer of its shares, especially when you consider there are so many other options out there…
