International money transfer business Ozforex Group Ltd (ASX: OFX) slumped to a multi-year low of $2.01 this week as the froth continues to come out of its valuation.
At that price the business is still on 20x trailing earnings per share of 10.1 cents, with 7 cents per share paid out in dividends on a trailing yield around 3.5%.
However, the stock has fallen around 28% over a past six months that included the hangover effect from its loss of banking counterparty Westpac Banking Corp (ASX: WBC) and the resignation of its chief executive. This week it also announced the resignation of its chief commercial officer with the new CEO only having been in the job for just over one month.
A high turnover of key staff for a business can be problematic as outsiders take a while to get their feet under the table and many investors want to be comfortable in management teams before committing to an investment. This is especially true of a relatively young business that is trading on a high multiple of earnings.
The loss of Westpac as a banking counterparty was also a considerable blow for the business, but it is unlikely to ever be short of a banking counterparty given the fee stream it can offer to such counterparties. Although it does stand to reason that the going may only get tougher for OzForex as it looks to work with critical counterparties on commercially acceptable terms.
That said OzForex would also appear to have some attractive aspects to its business model in its high profit margins, scalability and large markets to grow into.
However, in my opinion the real fly in the ointment is the long-term soundness of a business model that is reliant on conflicted commission structures for staff.
These kinds of commission structures on the provision of general advice may again be subject to regulatory reform in Australia.
A read through OzForex's Financial Services Guide (FSG) will reveal disclosure of a flat 3% commission structure earned by some staff on the effective spread on a trade (the profit). Therefore the larger the profit, the larger the employee's commission. It's also disclosed that other commissions are also earned by employees on an (undisclosed) "sliding scale based on total monthly profit and fees with a two year trailing arrangement".
Of course OzForex may be able to carry on with this business model indefinitely in which case it may prosper long into the future, although in my opinion risks remain around regulatory reform in this area.
If the regulator did toughen up, I would not be surprised if OzForex fails to deliver the expected earnings growth in the years ahead. This in turn would likely see the stock price come under considerable pressure.
In my opinion OzForex remains a high-risk investment and I think investors would be better off looking at other businesses built for the future on much steadier ground.
