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OzForex sees growth ahead

We’ve certainly seen a frenzy when it comes to initial public offerings of late. Online foreign exchange company OzForex (ASX: OFX) has had a sparkling debut on the ASX, closing  at $2.59 on its first day of listing, a handy premium to its issue price of just $2.

The issue price was something of a premium valuation already, at 21.7 times estimated profits of $18.6 million in the 2014 financial year. It seems investors have high expectations of OzForex, and there’s every chance the company could deliver. In its prospectus, the company forecasts that after growing net profit after tax by 30% in 2013, it will go on to deliver another 30% in the current year and a whopping 38% in the first six months of financial year 2015.

Company overview

OzForex was conceived by Matt Gilmour more than 10 years ago. The founder, and early investor Gary Lord, have cashed out most of their shares, receiving about $65 million each, but are also sitting on some nice paper profits on their remaining holdings. Mr Gilmour and Mr Lord each still hold around 4% of the company.

The main premise of OzForex is to provide foreign exchange (FX) services to retail and smaller customers who were getting ripped off – according to Mr Gilmour – by the banks. OzForex reportedly charges a margin of as low as 30 basis points (0.3%) for international money transfers, where the big banks have typically charged 400 basis points (4.0%)on those transactions.

The company has first mover advantage as a disruptor, something the likes of REA Group (ASX: REA), Carsales.com (ASX: CRZ) and Seek (ASX: SEK) have all enjoyed. OzForex generates profits by aggregating hundreds or thousands of small customer deals and then on-selling the total amount in the interbank market at wholesale rates. OzForex reports that it handled $9.1 billion in FX transactions with 460,000 funds transfers  last year, and records 2 million website visits each month.

OzForex specifically deals in funds transfers for small businesses and individuals that need to transfer funds from one country or another, and doesn’t deal in cash or travellers’ cheques. The average consumer transaction was $14,300 in 2013, while business clients had an average transaction size of around $29,000.

Growth

To grow from here, OzForex plans to enhance its core businessby making it easier for clients to use its services (including mobile/app functionalities), achieve further growth in recently entered markets including Hong Kong, and expand into some or all of the 22 states in the US where it doesn’t already hold a licence. In fact, the US is expected to be one of the key drivers of growth, with Mr Gilmour labelling the US foreign exchange market today as opaque as Australia’s 10 years ago.

OzForex also wants to expand its international payment solutions, including branded partnerships with companies such as Travelex, and offer a broader range of products and services into existing and new customer segments. As an example, OzForex offers a pre-paid reloadable multi-currency travel debit card in Australia.

Risks

But OzForex may not have it all its own way. So far the big banks have been slow to react to the cheeky upstart that is stealing their business, and could be expected to improve their foreign exchange services for smaller customers. OzForex needs to maintain relationships with the major banks to transact with in the interbank market. As the company grows larger, banks could cease to offer services to OzForex or charge the company higher margins, which could restrict OzForex from providing some of its services; or increase its operating costs, which would have to be passed onto customers.

Foolish takeaway

Despite the current price appearing expensive, if OzForex can continue to grow at the rates it has forecast, today’s price could look cheap. This is one company Foolish investors may want to add to their watchlists.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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