Ever since the initial public offer of international money transfer business OFX Group Ltd (ASX: OFX) (the former OzForex Group) in October 2013 I have written multiple times that I think this is business best avoided by investors.
And not for nothing either.
However, only now the is the market coming round to my point of view with the stock trading at multi-year lows and more than 10% below the $2 per share 2013 IPO price.
On the surface, OFX Group may seem like an attractive business thanks to its margins, scalability and track record of growth. However, I believe a proper understanding of the business model and what drove its historic success, inter alia, will lead investors to a different conclusion.
Below I have six reasons why I think this is a business to avoid.
- Business Model – Make sure you have read and understand OFX's Financial Services Guide and its disclosures around fixed-percentage commissions paid to its staff on the profit derived by it on each FX transaction. I would suggest you consider how this has driven historical profit growth and the impacts of any potential regulatory changes that could threaten this commission structure.
- Insiders in spectacular IPO selldown – At the IPO stage more than 91% of the multiple owners' equity was dumped for cash by the insiders. The remaining 8.46% of owners' shares were placed in escrow where they were allowed to be disposed of before the end of 2014. Investors then should consider what prompted such a mass exodus of ownership in a business by its insiders if its growth prospects and business model were so great?
- Macquarie dumped its holding – The bankers at Macquarie Group Ltd (ASX: MQG) dumped their entire 19.9% holding at the IPO stage. Macquarie though did act as a lead manager on the IPO and has subsequently been a long-term supporter of OFX. However, according to news reports it recently downgraded its rating on the stock.
- Western Union got cold feet – One of the world's most powerful money transfer businesses also apparently liked what they saw on the surface with OFX Group. WU even went as far as making a conditional takeover offer for OFX in November 2015. However, after a due diligence period Western Union seemingly got cold feet and in February 2016 it was announced discussions had been terminated. If I were an OFX investor I would want to be comfortable on the reasons no takeover offer eventuated.
- Competition – The money transfer industry has extremely low barriers to entry and could also be disrupted by fintech-based competitors offering consumers alternatives to OFX Group.
- Valuation – OFX group earned 9.09 cents per share in FY16, which means it still trades on 19.5x trailing earnings when selling at today's multi-year lows of $1.77. Even if you are prepared to disregard all of the issues outlined above this stock still looks expensive to me, especially when compared to other opportunities.
