Why the Ozforex Group Ltd share price is up 12% today

The online foreign exchange company is enjoying a strong re-rating after management issued a bullish outlook and reported a stellar first quarter result. Is it too late to buy into the story?

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Online international payments company Ozforex Group Ltd (ASX: OFX) is the best performing stock on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) this afternoon following its bullish outlook commentary.

The stock surged 12% to $2.53 in after lunch trade and the rebound marks a sharp turnaround in sentiment towards OzForex, which had collapsed to a low of $2.03 last month on worries about the sustainability and growth of its business model.

Management put those worries to rest at its annual general meeting yesterday when it reported a stellar first quarter result after the market closed.

Revenue for July hit a record $10 million as net operating income surged 31% to $25.5 million for the the three months to July on the back of a 22% increase in the number of transactions over the same time last year to 193,000.

Management is promising more good news. It launched its "Accelerated strategy" with the aim of doubling 2015 revenue in four years to over $200 million with a $20 million investment over 2016-17 and 2017-18.

OzForex will achieve this ambitious goal by focusing on capturing greater market share in Australia, increase its offshore penetration (in particular the US), and pursuing related opportunities in wholesale, mobility and lower value payments.

What's more, the company is forecasting earnings before tax, depreciation and amortisation (EBTDA) of between $38.5 million and $40.5 million for the year ending March 31, 2016. This would represent a 14.5% increase over last year's EBTDA if the mid-point of the guidance is used.

This is probably in line with what most analysts were expecting, but the market had been sceptical after Westpac Banking Corp (ASX: WBC) said it would stop providing services to OzForex in January.

There were worries that other institutions would follow suit as OzForex is seen as a potential "disruptor" to the banking industry by offering a cheaper way for users to send and receive foreign currency transactions that are $1,000 or more.

But OzForex needs to partner with banks to facilitate the transfers and management's reassurance about its future was enough to trigger a re-rating in the stock.

I think there's plenty of room for Ozforex to grow given the overwhelming dominance of banks in this niche market.

On that basis, the stock looks cheap as it is trading on a 2016-17 price-earnings multiple of 17x when other industry disruptors typically trade at over 20x.

Further, OzForex pays a decent fully frank dividend and is on a 2016-17 forecast yield of 5.6% if franking credits are included.

Motley Fool contributor Brendon Lau owns shares of Ozforex Group Ltd,Westpac Banking. Follow me on Twitter - https://twitter.com/brenlau The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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