OFX (ASX:OFX): 5 months after backflipping on its growth promises, where to next?

Only a few weeks ago, OFX (ASX:OFX) shares shed a third of their value after a weak 1HY24 trading update. The question we’ll explore here is the same one that should be asked after every intraday crash along the lines of this magnitude? Is it a short-term issue that’ll only mean a chance to buy more of a great company at a cheap price, or the beginning of longer-term issues? Substantial shareholder Australian Ethical thinks the former, judging by the fact that it bought ~3m shares in recent days.

OFX (ASX:OFX) share price chart, log scale (Source: TradingView)

You can see that the most recent crash was not the first, and may not be the last. But how did the company get to this point?

Introduction to OFX

OFX was founded in 1998 by Matthew Gilmour and Gary Lord from the former’s house at Sydney’s Northern Beaches. The pair thought consumers needing foreign exchange services could get better service at a better price. From those humble beginnings, it was a slow and steady journey, but by the time it listed in 2013 at $2 per share, it generated $1bn in turnover and had a presence in several markets globally – in Australia, the UK, Canada, the United States, Europe and the Asia-Pacific. Unfortunately, there were tough times in the first few years with disappointing results, the loss of a partnership with Westpac and takeover interest from Western Union (at $3.70 a share) ultimately falling through.

But things have been better for OFX since it hired John Alexander (‘Skander’) Malcolm as CEO and pivoted from consumers to business – a segment that generates more recurring revenue. Typically, consumers only need forex services every now and again, but businesses that need forex services will need them regularly. Clients want competitive pricing, high standards of security, the ability to manage volatility risk of forex exposure and the ability to speak to a human being when things go wrong (not a chatbot) and OFX provides this enhanced service.

OFX’s business model is simple: Transferring money from one country to another. OFX will calculate the amount to be transferred to the account and transfer the funds, receiving them into its bank account in country A. Then its correspondent bank in country B will transfer those funds to the client’s bank account – minus its own fee.

Historically this was charged as a percentage of the transaction and was 0.5%, whereas larger institutions charged more. But now it’s a flat $15 fee if under A$10,000, but no fee if it’s above that amount. OFX also makes money by taking a forex spread on each acquisition – the difference between the rate quoted by OFX to its client and the cost for OFX to acquire the currency.

Clients can be consumers or businesses and the reasons for transfers are endless, from transferring money between family members or purchasing a vintage car or villa in another country. These can be one-off transfers, regular transfers or in some instances OFX’s software is integrated into a business’ own software to make transfers seamless. One of OFX’s most notable clients in the latter respect is logistics software giant WiseTech (ASX: WTC).

Will it deliver on its promises?

When OFX handed down its FY24 results (in May 2024, given the company uses an April to March financial year), it told investors that it would deliver at least 10 per cent NOI (Net Operating Income) growth per annum over the next 3 years. As well as an EBITDA margin of 28-30%.

Given its NOI was only up 6% (to $227.5m), its revenue and EBITDA were both up by smaller margins (plus its NPAT was down 10%), this may have been a tough ask to begin with. But investors have every right to hold you to account once you’ve made those promises as a company.

Five months later, in October 2024, OFX advised investors it would deliver NOI of $111m (down 3.5%) and EBITDA of $28m (down 8%). The company told investors that later than anticipated shifts in the interest rate cycle saw a slower rebound in consumer confidence. And this is not just in Australia, but even in the UK where Corporate transaction volumes were down 22% and Canada saw a 7% decline.

The company still expects NOI growth, but less than the 10 per cent promised, and for a 28% EBITDA margin which could be lower if there were unanticipated bad debts. Investors said it was still committed to those targets in the longer-term, but would provide an update on the medium term at its FY25 results due in May.

The company handed down its results a few weeks later and these were in line with is guidance. We would also note its underlying profit fell 20.6% and statutory profit fell 32%.

Source: Company

Conclusion

Would we buy this company? Probably not, at least until the promised further update in May. You have to keep in mind that it is a l0w-margin business (with a <1 per cent NOI margin) with a small market share where banks and incumbants hold the majority stake. Yes, there’s potential for smaller providers that target SMEs rather than large corporates to do well, but it is difficult for companies to stand out other than branding and marketing.

We do take confidence in AEF’s buying, and that it hasn’t been the most vulnerable to tough economic conditions, but we’d prefer to sit on the sidelines for now.

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