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Why the OFX Group Ltd share price is heading lower again

This morning international money transfer business OFX Group Ltd (ASX: OFX) handed in its results for the full year ending September 30 2017. Below is a summary of the results for H1 18 with comparisons to the relevant prior corresponding period (pcp).

  • Net profit after tax of $8.3m, down 14% on H1 17 due to timing of income tax benefits
  • Net operating income $53.6m, up 0.1% on pcp
  • Total operating expenses $40.3m, up 0.5% on pcp
  • EBITDA flat at $13.4 million versus pcp
  • EBITDA margin of 24.9%, down from 27.7% in prior half
  • Interim dividend of 2.4 cents per share
  • Earnings per share of 3.45 cents, down from 4.14 cents in prior half
  • Active clients 160.1k, up 5.1%
  • Turnover $10.3b, up 8.1% on pcp

Another flat year for the group as operating metrics such as active client numbers and transaction volumes improve, but average transaction size drops 4.1% to $21,900.

This suggests the group is winning slightly higher margin retail business, but the falling average transaction volumes are hurting net operating income growth rates.

I’ve warned multiple times before how OFX’s business model historically has relied on the commission sharing arrangements offered to staff in in terms of remuneration partly based on 2%-5% of the profit (spread) on each transaction.

This model worked well in the lead up to its IPO, but since then many key insiders have left the business and sold out their ownership stakes. Around the time of the IPO the Future of Financial Advice Reforms (FOFA) at one point threatened to put an end to conflicted remuneration in the provision of general advice on FX products. As such I warned that OFX Group’s best growth days were probably behind it as insiders rushed to sell out their ownership stakes in the business.

Staff turnover has also generally been high, which means this is not the same business as that marketed at the IPO stage.

While the commission sharing business model has survived it seems the focus is now on client service over profit margins. Online competition from other FX providers is also pressuring margins, without the problems associated with a high staff turnover.

Competition has grown in Australia as the space is relatively lightly regulated compared to overseas and barriers to entry are relatively low. This may surprise some given the problems Commonwealth Bank of Australia (ASX: CBA) has experienced with its suspicious transaction reporting to the regulator AUSTRAC and it remains that money transfer businesses are vulnerable to higher costs via stricter transaction monitoring or reporting procedures.

Outlook

It seems OFX Group is now looking overseas for its growth with the U.S. market performing well, alongside mixed performance in other markets.

The group retains a strong balance sheets with $44.9 million cash in hand and no debt, which means it has plenty of firepower to invest for growth.

However, the stock is down 4% to $1.40 in response to today’s results and given the increasing competition and valuation I’m still not a buyer of OFX shares.

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