Fintech stock Ozforex trading at close to fair value
Key statistics: ASX: OFX
08/03/16 closing share price: $1.985
52 week high: $3.550
Most recent dividend: 3.6c
Annual dividend yield: 3.52
Ozforex is a provider of foreign exchange services.
It is often viewed as part of the "hot fintech" (financial technology) sector as it seeks to disrupt the major banks, which have traditionally dominated foreign exchange. Ozforex competes by providing an online service that is simple to use. Importantly, it can offer better rates (tighter spreads between buy and sell exchange rates) to attract people away from the banks.
It commenced business in Australia in 1998 in a garage on Sydney's northern beaches. It has grown quite rapidly and now has operations in six countries and a market capitalisation of about $500 million. In December it launched a single global brand, OFX.
Ozforex listed in 2013 and the share price has fluctuated between about $1.80 and $3.50 and is currently just over $2. In November 2015 the share price jumped when Western Union announced an indicative proposal to acquire the company for $3.50 to $3.70 a share. On February 8, Ozforex terminated discussions with Western Union and the shares descended rapidly to $1.79.
Looking at the business independently and evaluating it based on the merits of its financials, there is a lot to like. Industry analysts are collectively forecasting earnings per share to grow at 17pa over the next three years. The forecast dividend yield is 3.7%. Forecast return on equity is about 50% and there is no debt. Cash flow generation is very strong, far exceeding reported profits.
Lastly, we need to address the question of whether the shares are cheap, expensive or fair relative to their intrinsic value.
Following the decline in the share price in February, the shares are now trading at close to fair value. With intrinsic value forecast to grow at 26%pa, there is potential for significant upside.
The shares are trading on a forecast price-earnings ratio of 20, which is not unreasonable for a growth stock. And, of course, there is always the possibility that someone else may be interested in acquiring it - but that is speculation. It is always best to assess a stock on its own merits, and on that basis Ozforex looks good.