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Why the OFX share price is down 10% since its 2013 IPO

The OFX Group (ASX: OFX) share price tumbled 9% lower in morning trade to $1.76 after the FX transfer provider told investors to expect fiscal 2019 EBITDA (excluding one-off costs) between $30.9 million to $32 million.

The group also reported stable net operating income margins and that February saw the first active client growth in 10 months.

The CEO commented: “Market conditions have been challenging relative to the prior year, given lower levels of currency volatility and softer global spot transaction volumes. While active clients have not grown as much as anticipated, we saw growth in February.

This lack of active client growth is likely to worry the market and suggest OFX is feeling competitive heat from other discount non-bank competitors or newer disruptors such as UK start-up TransferWise that is now competing in the key B2B space.

In the online money transfer world retail clients tend to offer better margins, but far lower volumes compared to SMEs in the import and export space.

I’ve also pointed out since OFX Group listed in 2013 that it’s business model has a problem in that employees (as disclosed in its FSG) are paid a 2%-5% commission on the spread of every FX transaction.

In other words the bigger the spread (or the worse the rate for the client) the more the employee earns.

This kind of conflicted remuneration structure was once targeted for abolition by the original Future of Financial Advice reforms back in 2012, before the reforms were later watered down by the government under protest from affected industries.

It remains my firm belief that the then OzForex went to IPO in 2013 when its founders and insiders rushed to sell out alongside Macquarie Group Ltd (ASX: MQG) because they thought the conflicted profit-margin-making business model relied on a status quo they expected FOFA to uproot at the time.

As it is OFX Group has seen an incredibly high turnover of senior management since its IPO and the company’s profit-making and sales culture has been toned back after the original management team largely sold out in 2013.

The stock is down 10% since its 2013 IPO at $2 per share and anyone seeking an explanation for the poor performance should now understand it more clearly.

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Motley Fool contributor Tom Richardson owns shares of Macquarie Group Limited.

You can find Tom on Twitter @tommyr345

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 Scott Phillips.

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