Net 1 UEPS Technologies, Inc. (NASDAQ:UEPS) has been running hard in 2015, up 69 percent since the start of the year, and up 13 percent since I wrote about it on June 10. It’s getting close to exiting the All Investable Screener, but it remains cheap on any number of metrics. With a market cap of ~$900 million, and ~$50 million in net cash, it has an enterprise value of ~$850 million. It generated $123 million in operating income over the last twelve months, putting it on an acquirer’s multiple of just 6.85x. It trades on a PE of 9, and has generated FCF/EV of 12 percent. It’s putting that a little of that free cash flow to good use, buying back a dab of stock ($7 million).
UEPS provides payment solutions and transaction processing services for various industries in South Africa, Korea, Europe, and internationally, primarily for countries where the population is largely unbanked.
Growth at reasonable price, long-term horizon, long/short equity investor Steve Guenette likes it. Here’s his write up:
Fundamental Quality
In terms of fundamental quality UEPS is extremely strong. The company has a TTM operating profit margin of 21.50%, towering over the business services industry average of 11.13%. For TTM return on equity the story is the same, with UEPS’ 22.86% figure beating the 16.85% average. In terms of asset utilization; however, UEPS trails the pack marginally, generating only $0.51 for every dollar in assets compared to the $0.76 industry average.
Looking to the company’s balance sheet, a current ratio of 1.345 is strong enough to not create any problems while the company’s $111 million in cash and cash equivalents more than covers the $60 million the company has in debt.
Here’s he sees the value:
Valuation
UEPS Business Services Industry Price to TTM Earnings 8.85 27.79 EV to TTM Revenue 1.27 2.26 Price to Book Value 1.87 4.52 In any comparison to the overall industry UEPS’ valuation is severely depressed. Back in 2012 when allegations were made against UEPS of possibly using corruption and bribery to win a contract to distribute social grants to 9.6 South Africans the company’s reputation and valuation were crushed.
UEPS’ EV to TTM revenue ratio went from regularly trading in the 2-3 range to trading in the 0.5-1 range.
The allegations were made by a rival bank in the region who had lost out on the contract, and eventually the South African Supreme Court ruled that UEPS had engaged in no wrong-doing.
Still the company’s reputation remains in peril, and even to this day UEPS trades at multiples that are a fraction of what they were previously.
In March 2017 this South African contract expires. Among the investing community there are real concerns that the South African government will not renew the contract. It appears to be very unlikely that the South African government, which is having a whole host of troubles currently, would make a costly transition over to a new system, but even if the contract is cancelled, UEPS’ other growth opportunities should more than outweigh this loss.
As the market adjusts to the reality of UEPS’ strong position and comes to appreciate the immense growth potential of the company, the company’s valuation will normalize. Even using the extremely conservative 2016 EPS estimate of $2.19 I can see shares anywhere from $32.85 (15 P/E) to $48.18 (22 P/E) by the start of 2017.
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