OzForex: Result 2015

Last year's disappointments for OzForex largely stemmed from a dearth of new clients, while it did a better than expected job of holding on to the ones it already had. In the year to March 2015, it was the reverse: helped by the volatility in the Aussie dollar – the company beat the consensus forecast for new clients (60,700 compared to 60,100), but struggled to hold onto its existing clients.

The overall retention rate dropped from 2014's impressive 72% to 68%, largely due to lower rates within its Travelex and Moneygram products. As a result, existing clients rose 'only' 25% in the year to 81,800 (compared to the consensus forecast of 83,700) and total active clients rose 'only' 18% to 142,500 (forecast 143,800).

There was good news in the number of transactions undertaken by these clients, which rose 21% to 702,800 (forecast 692,900), and the average value of these transactions, which edged up 1% to $23,700 (forecast $23,250), so that the total transaction value rose 22% to a slightly better than forecast $16.6bn.

The fee margin on this edged up to 0.53% (from 0.52%), so that fee income rose 24% to $88.4m – only slightly below the $88.6m forecast. Unfortunately, however, the jump in new dealing clients came at a cost and a 31% increase in promotional expenses pegged net profit back to a 21% rise to $24.3m and pro forma earnings per share to an 18% rise to 10.1 cents (compared to a forecast of 10.3 cents).

Geographically, the highlight was the US, where fee income rose 53% to $12.9m. Asia was disappointing, which struggled to gain traction due to 'competitive trading conditions', with growth of only 8% to $1.8m. Revenue from Australia and New Zealand rose 22% to $50.7m – 57% of the total.

Taking the Helm

The other big news (from last week) is the appointment of a new chief executive to replace Neil Helm. Richard Kimber will take over on 1 June, although Helm will be available for two months to help out. Kimber was most recently chief operating officer of ANZ Global Markets (incorporating its foreign exchange business), but before that held positions (going backwards in time) as chief executive of the now-defunct social networking site Friendster, regional managing director for Google in South-East Asia, Australia, NZ and Korea, and chief executive of FirstDirect, HSBC's online bank in the UK.

We tend to prefer internal appointments for senior positions, but this can be hard for very young companies, and at least Kimber has an excellent blend of experience for the job. He'll provide an update on 'the company's strategic direction and outlook' at the annual meeting on 5 August.

The stock is down 10% today, but expectations have been rising ahead of the result, with the price rising 20% over the past month. In the event, those expectations haven't been fulfilled, so the stock has given up half the gains.

Looking at the bigger picture, though, the result puts Ozforex on a historic price-earnings ratio of 24, and that should continue to fall rapidly even if forecasts for high teens earnings growth aren't met. The earnings are also almost entirely backed by free cash, providing a free cash flow yield of around 4% and a dividend yield of 3% – again, attractive numbers for a company that's growing so quickly.

The stock is up slightly since OzForex CEO resigns on 6 Feb 15 (Hold – $2.33), but we'd want a larger margin of safety before upgrading again. HOLD.

Note: Our Growth and Income portfolios hold shares in OzForex.

Disclosure: The author owns shares in OzForex.