Money transfer business Ozforex Group Ltd (ASX: OFX) today posted a statutory net profit of $12 million for the half-year ending September 30, up 26% on the prior corresponding period. Total transaction value was $7.5 billion and active clients were 129,900, up 21% on the prior period.
The market liked the result pushing the stock up around 10% to $2.47 in morning trade.
Having hit the ASX boards in October 2013 the business has performed roughly in line with pro-forma prospectus forecasts. It will deliver an interim dividend of 3.5 cents per share on earnings per share of 4.99 cents for the period. This is near the bottom of the group's targeted range for paying out 70-80% of net profit to shareholders.
The broker said the result was driven by strong active client and transaction growth, with the U.S. business also delivering a maiden profit. The U.S. market is attractive by virtue of its size alone and potential success there is a tantalising prospect.
Advantages
OzForex's meteoric rise is based on its ability to undercut the dismal foreign exchange rates offered by the big banks to retail clients and small to medium-sized businesses. The banks will typically charge a spread towards 4%, high compared to what businesses like OzForex can offer.
With a simple business model, big unmet markets, the tailwind of globalisation, scalability advantages, and relatively light costs, OzForex looks a decent bet for the future.
Risks
However, like all businesses there are risks. In my opinion it has no big competitive advantage and barriers to entry are low, although it's questionable just how much impact competitors will ever have on OzForex.
The big banks are unlikely to ever see it as worthwhile sacrificing margins to compete, and if they ever did act it would likely be a consequence of OzForex performing phenomenally well into the future. Under that scenario today's shareholders would likely be laughing all the way to the bank anyway.
Disruptive competitors are probably more of a threat, but again unlikely to have a real impact given OzForex has the ability to innovate and compete on cost itself.
OzForex also carries some regulatory risk given remuneration structures paid to staff and central to the profit-making business model could one day come under renewed regulatory focus. Although this now looks unlikely given Australia's current political, legislative, and regulatory environment.
Should you buy?
If you assume the business earns around 9.4 cents per share for the full year ahead, it would be on a forward price earnings (PE) ratio around 26, with a slightly higher earnings growth rate of 28%.
Selling for $2.47, this gives it a cheap-looking (estimated) price-earnings to growth (PEG) multiple just under 1, when based on forward earnings assumptions.
This suggests the shares are attractively priced at current levels, if the business can keep growing at (or close to) current rates.
