Pivot To B2B Spending Management Will Attract Clients Seeking Comprehensive Services

Key Takeaways

• Pivot to B2B and investment in new platform with multicurrency accounts aim to increase revenue through enhanced client retention and service offerings.
  
• Global rollout and strategic use of analytics and technology could boost non-FX revenue, improving margins and capturing new, localized market opportunities.
  
• Delayed interest rate changes and macroeconomic uncertainty have impacted OFX Group's earnings, active client retention, and revenue growth in key markets.

Catalysts

Provides international payments and foreign exchange services in the Asia Pacific, North America, Europe, the Middle East, and Africa.

• OFX is pivoting to B2B with a focus on spending management solutions, which could enhance revenue by attracting clients seeking comprehensive financial services rather than just FX transactions.
  
• The company is investing in its new client platform with multicurrency accounts and card functions, potentially increasing revenue through higher customer retention and usage of additional services beyond FX.
  
• Expanded offerings of subscription, interchange, and merchant fees through the new platform could boost non-FX revenue, positively impacting net margins due to higher-margin products.
  
• A global rollout, starting with Canadian and UK markets in fiscal year '25, aims to capture new clients and grow revenue by providing more competitive, localized financial service solutions.
  
• OFX is leveraging analytics and technology to optimize pricing and manage cash balances efficiently for interest income, which could improve earnings by sustaining strong NOI margins.

OFX Group Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming OFX Group's revenue will grow by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.3% today to 1.7% in 3 years time.
• Analysts expect earnings to reach A$4.1 million (and earnings per share of A$0.04) by about March 2029, down from A$16.5 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 61.8x on those 2029 earnings, up from 8.3x today. This future PE is greater than the current PE for the AU Diversified Financial industry at 12.0x.
• Analysts expect the number of shares outstanding to decline by 0.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.36%, as per the Simply Wall St company report.

Risks

• The unexpected macroeconomic conditions in the first half of FY '25, particularly the delayed interest rate easing in the U.S. and not starting in Australia, impacted corporate confidence and led to deferred high-value transactions, affecting revenues in key markets like Canada and the U.K.
  
• Corporate Average Transaction Values (ATVs) decreased by 13.5% globally in September, with significant declines of 9.4% in Canada and 19.5% in the U.K., potentially reducing overall earnings.
  
• The company experienced a 3.5% revenue growth in the Corporate segment, which was below expectations and suggests possible future risks to revenue if macroeconomic challenges persist.
  
• Net profit after tax decreased by 32.3%, primarily due to a $2.2 million non-cash fair value loss on contingent consideration for Paytron, hinting at potential volatility and unpredictability in net earnings.
  
• Active client decline in the Corporate segment in the first half, coupled with a revenue decline in the High Value Consumer segment by 3.6%, may signal ongoing risks to revenue growth and client retention.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of A$0.91 for OFX Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be A$246.4 million, earnings will come to A$4.1 million, and it would be trading on a PE ratio of 61.8x, assuming you use a discount rate of 7.4%.
• Given the current share price of A$0.59, the analyst price target of A$0.91 is 34.3% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.