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8 reasons why OzForex Group Ltd is a good buy

I recently purchased shares in OzForex Group Ltd (ASX: OFX) following a 25% fall in the share price over two days last week. The fall was due to analysts being disappointed by the growth in subscribers over the 12 months to 31 March 2014. I believe the sell off is an overreaction and that we will see the share price much higher over the next two to three years. Here’s why:

  1. Investors were disappointed in OzForex’s customer numbers. Customer numbers increased by 31% to 120,500, just 2,500 below the prospectus forecast of 123,000. This is still a very impressive number.
  2. Net profit after tax increased by 33% to $20.1m before one-off costs, smashing the prospectus forecast of $18.6m.
  3. OzForex is the provider of low-cost, easy-to-use, and secure foreign exchange transfers. The market is currently dominated by the big banks who charge frankly ridiculous fees to small and mid-sized businesses and individuals transferring money between currencies. This is a large and growing market.
  4. OzForex has been around for 10 years and currently commands around 5% of the Australian foreign exchange market. It also has operations, but far less of the market, in the US, UK, Canada, Hong Kong, and New Zealand. An increase in market share will provide a disproportionately large boost to profits as OzForex is an extremely scalable business. The company believes it can triple volumes without adversely affecting performance.
  5. OzForex’s platform and service is second to none that I have used. It also provides travel credit cards with exchange rates generally better than competitors. OzForex’s market and reach will grow via word of mouth and targeted advertising.
  6. The company targets transfers between bank accounts in different countries and reports an average transaction size of $14,000 for consumer clients and $29,000 for businesses. Demand for OzForex’s service is unlikely to diminish over time as internet penetration increases in developing countries and a greater proportion of workers move overseas.
  7. The dividend of 2.4 cents represents a yield of only 1% this year, but this is forecast to grow to at least 3% next year as the payout ratio should increase significantly.
  8. Finally, this is a company growing quickly. While it is now trading on a trailing price to earnings ratio of around 35, this is expected to fall below 20 in two years with compound earnings per share growth of around 25% expected.

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Motley Fool contributor Andrew Mudie owns shares in OFX. You can find Andrew on Twitter @andrewmudie

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