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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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Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17

Net1 share price

Net1UEPS Technologies Inc

Acquisitions create growth platform

but Sassa contract issue increases risk

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