Undervalued Net 1 UEPS, FCF/EV Yield 31%, ROE 16% – All Investable Stock Screener

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One of the cheapest stocks in our All Investable Stock Screener is Net 1 UEPS Technologies Inc (NASDAQ:UEPS).

Net 1 UEPS Technologies, Inc. (UEPS) is a provider of payment solutions, transaction processing services and financial technology across multiple industries. The company develops and markets a transaction processing solution that encompasses its smart card-based alternative payment system for the unbanked and under-banked populations of developing economies and for mobile transaction channels. The company operates through three segments: South African transaction processing, International transaction processing, and Financial inclusion and applied technologies. The company also provides secure transaction technology solutions and services, by offering transaction processing, financial and clinical risk management solutions to various industries. It offers secure online transaction processing, cryptography, mobile telephony, integrated circuit card (chip/smart card) technologies, and the design and provision of financial and value-added services to its cardholder base.

A quick look at UEPS’s share price history over the past twelve months shows that the price is down 7%, but here’s why the company is undervalued.

(Source: Google Finance)

The following data is from the company’s latest financial statements, dated March 2017.

The company’s latest balance sheet shows that UEPS has $223 Million in total cash and cash equivalents. Further down the balance sheet we can see that the company has short-term debt of $9 Million and long-term debt of $16 Million. Therefore, UEPS has a net cash position of $198 Million (cash minus debt).

If we consider that the company currently has a market cap of $554 Million, when we add the minority interests of $4 Million and subtract the net cash totaling $198 Million that equates to an Enterprise Value of $360 Million.

If we move over to the company’s latest income statements we can see that UEPS has $115 Million in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 3.13, or 3.13 times operating earnings. That places UEPS squarely in undervalued territory.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that UEPS generated trailing twelve month operating cash flow of $127 Million and had $16 Million in Capex. That equates to $111 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 31%, and a record high in the past eight years.

While some analysts will point to the current revenue of $606 Million (ttm) and net income of $86 Million and make comparisons to FY2015 revenues of $626 Million and net income of $95 Million I would argue that the company’s current free cash flow of $111 Million (ttm) trounces the $99 Million generated in FY2015. That’s an increase of 12%. Moreover, the company has increased its BVPS from $9.88 in FY2015 to $10.31 (ttm) and significantly reduced its capex by $20 Million from $36 Million in FY2015 to $16 Million (ttm) today.

Lastly, its also worth taking a look at UEPS’s annualized Return on Equity (ROE) for the quarter ending March 2017. A quick calculation shows that the company had $505 Million in equity for the quarter ending December 2016 and $594 Million for the quarter ending March 2017. If we divide that number by two we get $549 Million. If we consider that the company has $86 Million (ttm) in net income, that equates to an annualized Return on Equity (ROE) for the quarter ending March 2017 of 16%.

With all of this in mind it is therefore difficult to understand UEPS’s current P/E of 5.9 compared to its 5Y average of 12.6**, and even more difficult to understand why the company trades on a share price of $9.62, compared to $20.58 in August 2015. The company remains financially sound with a Piotroski F-Score of 8, an Altman Z-Score of 2.40, and a Beneish M-Score of -2.36.

In terms of its current valuation. UEPS currently holds 40% of its market cap in cash. The company is trading on a P/E of 5.9 compared to its 5Y average of 12.6**, a FCF/EV Yield of 31%, and an Acquirer’s Multiple of 3.13, or 3.13 times operating earnings. UEPS is currently generating eight year high free cash flow and has an annualized Return on Equity (ROE) for the quarter ending March 2017 of 16%. All of which indicate that the company is undervalued.

** Morningstar

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