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Wealth and Investment Management
Smart Company Analysis
[email protected] www.absastockbrokers.co.za
16 February 2017
Please refer to important disclosure at the end of this document
Background
Net1 is a provider of alternative payment systems that leverage its Universal
Electronic Payment System (UEPS) to facilitate biometrically secure, real-
time electronic transaction processing to unbanked and under-banked
populations in an online or offline environment. In addition to payments,
UEPS can be used for banking, healthcare management, payroll,
remittances, voting and identification. It provides payment solution platforms
mainly in SA and South Korea. It also offers financial services and hardware
and software sales. Net1 has its primary listing on the Nasdaq index in the
US and therefore reports in US dollars. Its secondary listing on the JSE – it
generates more than 70% of its business in SA – requires it to report
headline earnings per share and it makes an effort to provide rand
supplementary information.
Net1 generates its revenues from transaction fees to government agencies,
merchants, financial service providers, utility providers, bill issuers,
employers and healthcare providers. It also provides loans and insurance
products and sells hardware, licensing software and related technology
services.
During FY16 it launched a new product, the EasyPay Everywhere bank
account (EPE). This is a sort of transactional bank account that gives clients
access to other financial services such as microloans, life insurance and
remittances as well as value-added services such as prepaid utilities and bill
payments through mobile phones and a national network of ATMs and point-
of-sale devices.
Our Thoughts
Net1 has been entangled in a legal wrangle since 2012 when it was awarded
the SA Social Security Agency (Sassa) contract to distribute social grants to
millions of welfare recipients including pensioners, to run until March 2017.
Although the Constitutional Court set aside the contract in 2013, Net1 has
continued to benefit from the contract jus aequum (it was for the greater good
of the society to ensure continuity of monthly grant payments). In 2014, a
new tender process – at the direction of the Constitutional Court – was
cancelled after it was alleged that none of the bidders met the requirements,
and this meant Net1 continued to benefit from the contract. There are
indications that the contract may be extended for two more years because
Sassa is not able to take over the payments when the contract lapses at the
end of next month.
Given the legal form of the Sassa contract, and hence as a revenue stream
for Net1, Intellidex has always been cautious when it comes to
recommending the stock. Management’s actions over the years, which
suggest a lack of confidence in current operations, support our catious view.
Although Net1’s operations have been cash-generative, management has
curtailed investment in current operations with capital expenditure
consistently below the depreciation and amortisation charge. Instead, it has
gone on an acquisition spree – investing in diversifying the business within
and outside SA. We reckon it is not a bad move at all as it reduces
concentration risk – in FY13 the Sassa contract contributed 42% to revenue
and this has been reduced to 21%.
EPE, the major investment in current operations, is also clouded with
uncertainty as it remains unclear to what extent it benefits from the Sassa
contract database. The government is also reportedly looking to outlaw the
direct deduction of payments from grant beneficiary accounts.
Equity Research
Hold
12-month target price
R175.36
Spot share price
R171.00
12-month implied total return
2.8%
Source: I-Net BFA
Key statistics
Market cap: R9.0bn
Net debt-to-equity: net cash
Price:earnings ratio: 7.4
Forward PE ratio: 7.3
Dividend yield: none
Forward dividend yield: none
Risk: high
12-month high: R176.00
12-month low: R118.00
Ave monthly volume: 249,460
Financial year-end: 30 June
Latest event
Interim results to end-December
Date announced: 26 August
Share details
Company: Net1UEPS Technologies Inc
JSE Code: NT1
Sector: support services
Hold
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Net1 share price
Net1UEPS Technologies Inc
Acquisitions create growth platform
but Sassa contract issue increases risk