MONEYGRAM INTERNATIONAL INC MGI
March 21, 2015 - 12:29am EST by
abra399
| 2015 | 2016 | ||||||
| Price: | 8.50 | EPS | 0 | 0 | |||
| Shares Out. (in M): | 63 | P/E | 0 | 0 | |||
| Market Cap (in $M): | 534 | P/FCF | 33.5 | 8.3 | |||
| Net Debt (in $M): | 774 | EBIT | 132 | 137 | |||
| TEV (in $M): | 1,309 | TEV/EBIT | 10.0 | 9.5 | |||
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- Payment services
- Customer Concentration
- Litigation
- Industry Consolidation
- Network effects
- Buybacks
- Financial services
- Potential Acquisition Target
- Private Equity (PE)
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Description
Recommendation:
BUY Moneygram International (MGI) common stock.
Summary:
Moneygram(MGI) is the 2nd largest Money Transfer company with ~5% market share (versus 15% for Western Union(WU) and 4.2% for #3 RIA). MGI has 350K money transfer locations globally versus 500K for WU and 243K for RIA. Money Transfers make up 87% of MGI revenue. They also offer other financial services such as Bill Payment, Money Orders, and Official Check Services. 23.6M shares (37.5% assuming conversion of preferreds) are still owned by Thomas H. Lee Partners at 12/31/2014, down from 50.9% on 12/31/2013 as MGI repurchased a portion directly from THL in April 2014. THL bought their stake during MGI's recaps in 2008 and 2011.
MGI has had some issues recently including (1) the introduction of Walmart private label money transfers in April 2014 causing significant declines in MGI’s US-to-US MT business (2) $60.7M owed from loss in tax court case in January (3) $80-90M in compliance upgrade costs from 2014-2016 ($52M already spent) and ~$6M/year compliance monitor costs through 2017 following Deferred Prosecution Agreement in 2012 (4) ongoing industry pressures (decreases in MT prices due to competition, online, cellphone-to-cellphone, etc.). But after having declined from $23 in July 2013 to $8.50 today these issues appear more than priced in.
MGI is currently trading at just 4.7x Adjusted 2014 EBITDA and 5.4x 2015E Adjusted EBITDA (5.8x and 6.7x if include all “one-time” costs and stock-option expenses in EBITDA and 4.8x and 5.7x if just include stock option expenses but exclude "one-time" costs), and ~8-9x our estimate of 2016 FCF. This is a significant discount to Western Union (WU) at 8.6x and 8.7x 2014 and 2015E EBITDA. If you value MGI at 6.5x 2015E Adjusted EBITDA (7.9x unadjusted EBITDA) it is worth ~50% higher than where currently trading. In 2015 FCF will be weak due to one-time items and higher agent bonuses; but in 2016 they should be able to generate $60-70M of FCF. So 50% upside equates to ~12x 2016 FCF.
The company repurchased 13% of shares in 2014 and has authorization to repurchase another 6% of outstanding shares in the open market as well as authorization to borrow up to $170M to repurchase additional shares directly from THL. Additionally, with the increased compliance costs for cross-border money transfers, as well as other scale advantages, I would expect consolidation in the industry. Given the large decline in MGI, I could see Euronet (which owns RIA) or WU purchasing MGI.
Positives:
MGI still has strong growth excluding US-to-US money transfers:
- While US-to-US revenue had a large drop due to the Walmart private label and US-to-US price cuts, MGI had transaction growth of 14% in "US Outbound" and 12% "Non-US" in Q4 (15% and 10% in FY2014) and revenue growth in high single digits (double-digit if exclude currency effects).
- US-to-US now only makes up 18% of transactions and 14% of revenue in Q4 2014, from 29% and 25% in Q4 2013 and is lower margin than non-US-to-US.
- MGI guided towards double-digit growth again starting in Q4 2015 (after the price decreases in US-to-US are lapped). I expect a bit lower than the company but high single digit revenue growth is achievable.
2nd largest Money Transfer network: MGI has doubled their locations in recent years, from 176K in 2008 to 350K currently (versus 500K for WU and 243K for RIA). There are network effects in this business and they no longer are at a large disadvantage to WU in terms of the size of the network, although WU still has 3x MGI's $Volume of Money Transfers. MGI continues to grow the number of agent locations, primarily focusing on the most profitable locations: Africa, India, and Eastern Europe (though growth in agent locations slowed in 2014).
Share Repurchases: After not doing any repurchases since 2007 they have spent $7.6M and $9.1M in Q4 and Q3 in open market repurchases and $133M in Q2 repurchasing from Thomas H Lee affiliates. They have remaining authorization to repurchase 3.7M shares in open market. They also have remaining authorization to borrow up to $170M to purchase shares directly from THL. Repurchases should continue, although they have to pay $60.7M in tax payment in 2H15, which could slow this down this year.
Debt: All debt outstanding is low cost (L+325bps with 100bps floor), doesn’t mature until 3/28/2020, and MGI is well within covenants.
Recoveries on Securities Losses: MGI suffered $1.3B of investment losses in 2007/2008 on RMBS/ABS/etc. MGI has recovered about $90.7M in settlements on these securities the past 5 years (including $23.0M in Q4 and $45.4M in FY2014). I would assume that the vast majority of these recoveries have been achieved but there is no visibility and future recoveries are possible.
Possible Acquisition Target: With MGI down 60%+ from July 2013 and trading at low multiples it could be an acquisition target. Euronet (which owns #3 RIA) has a $2.8B market cap with minimal net debt and has been growing RIA as fast as possible the last few years. Either Euronet or WU could pay a 50%+ premium for MGI and still have a good return after slashing overlapping costs.
Ownership: Abrams Capital filed a 13G on 2/20 with 3.6M shares (6.7% on stated shares outstanding and 5.8% on diluted basis assuming conversion of zero-coupon preferreds) up from 2.9M in initial 13G on 1/23/15.
Recent Issues:
Significant decline in MGI’s US-to-US money transfers due to introduction of Walmart Private Label:
- Walmart was 26% of MGI's revenue in Q1 2014 (~$400M annualized), including 12-13% ($190-200M) of that (and 9% of Revenue minus Commissions; lower margin than their other MT business) being Walmart-to-Walmart US money transfers.
- Walmart introduced their own private label money transfers in partnership with RIA on April 24, 2014 for Money Transfers up to $900 at 35-40% discount to MGI US-US transfers from Walmart.
- MGI's US-to-US transactions originated at Walmart were down 31% in Q2 (revenue down 33%) and 57% in Q3 2014 (revenue down 60%).
- As a result, MGI lowered pricing on 10/31 on all US-to-US money transfers by a Weighted Average 34%. MGI now charges only a slight premium to Walmart pricing. Commissions are variable (% of revenue).
- MGI US-to-US was down ~50% in 4Q14 vs 4Q13 and now represents only 14% of money transfer revenues in Q4 (down from 27% of MT revenues in Q1, 21% in Q2, and 17% in Q3 2014).
- Walmart represented 19% of Total Revenues in Q4 (down from 26% of revenues in Q1, 23% in Q2, and 21% in Q3 2014).
Tax Deficiency Ruling:
- MGI owes $60.7M due to Tax deficiency ruling on 1/7/2015. Will pay this in 2H 2015.
- MGI had taken tax deductions on securities losses during the recession. The tax court ruled these deductions are only available to a bank, that they are not a bank, and thus couldn't take the deductions. They plan to appeal but have to pay the deficiency prior to appealing. I think it's very low likelihood that they win the appeal.
Deferred Prosecution Agreement/Compliance Monitor/Compliance Upgrades:
- In November 2012, MGI entered into a Deferred Prosecution Agreement (DPA) with the U.S. Attorney’s Office for the Middle District of Pennsylvania and the Asset Forfeiture and Money Laundering Section of the Criminal Division of the Department of Justice relating to the investigation of transactions involving certain of the Company’s U.S. and Canadian agents, as well as its fraud complaint data and consumer anti-fraud program, during the period from 2003 to early 2009. Under the DPA, MGI agreed to pay to the U.S. a $100.0 million forfeiture (paid in November 2012) and MGI agreed to retain an independent compliance monitor for a period of five years (through 2017).
- The compliance monitor cost $6.1M in 2013 and $6.5M in 2014. These costs will continue through 2017. This is excluded from Adjusted EBITDA.
- The compliance monitor in their report in December 2013 required a Compliance Enhancement Program which will cost $80-90M from 2014-2016, ~50% opex, ~50% capex. $51.7M was spent through 12/31/2014; $29.4M in opex, $22.7M in capex.
Restructuring:
- $30-40M in restructuring costs in 2014-2015.
- Spending ~$40M in 2014 and 2015 on restructuring; spent $30.5M in 2014 so ~$9.5M remaining. They expect to generate $20M of pre-tax cost savings exiting 2015.
Increased Agent Bonuses:
- MGI paid $92M in agent signing bonuses in 2014 and expect to pay $65-80M in 2015. This is a significant increase over prior years.
- MGI says the increase is due to re-signing large agents for longer periods (~8 years versus ~5) and for signing new agents, not from increasing costs to get or retain agents, but it is concerning to see the large increase. Signing bonuses were only $45M in 2013 and $36M in 2012, so a large increase.
- Note that MGI amortizes these signing bonuses over the length of the contract and EBITDA excludes this amortization (thus high D&A and Capex). FCF is the better metric for valuation, although is lumpy.
Currency: The USD has strengthened significantly in the last few months versus other markets.
- Money transfer was down 10% YoY in Q4 while constant currency revenue was down only 8%.
- This will be depressed in the short term but over time should even out.
2007/2008 Investment Losses:
- $1.5B of investment losses in 2007/2008. The float was invested at that time in RMBS/ABS/etc.
- Recap in March 2008 with $1.5B of gross equity and debt capital. Equity was convertible preferred to Thomas H Lee Partners for $760M.
- Now keep float in lower risk securities, primarily cash and US govt backed ST instruments.
Industry Negatives/Risks:
Continued Global Decrease in Money Transfer prices:
- The Global Average cost to send $200USD has declined from 10% to 7.9% since 2008.
- The Global Weighted Average cost to send $200USD has declined from 8.5% to 5.7% since 2008.
- Continued competition from RIA and other low-priced competitors (including XOOM with online) as well as cell-phone transfers (M-PESA) and pre-paid bank cards will likely continue to drive prices down over time. Many of these risks are covered in detail in the WU VIC Writeups (and comments), particularly the short writeups on 8/29/13, 6/6/13, 11/13/12.
Industry/Competition:
| 2014 | Western Union | Moneygram | Ria | M-PESA | Other | Total |
| Agents/Locations | 500,000 | 350,000 | 243,000 | 165,000 | ||
| Countries | 200 | 200 | 134 | |||
| Money Transfer Revenue (million) | 4,467 | 1,275 | 516 | |||
| # of Money Transfers (million) | 255 | 85 | 49 | |||
| $ Volume of Money Transfers (million) | 85,400 | 29,000 | 24,400 | 14,400 | 428,800 | 582,000 |
| Market Share (by $ Volume) | 14.7% | 5.0% | 4.2% | 2.5% | 73.7% | 100.0% |
| World Bank: | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014E | 2015E | 2016E | 2017E | ||
| Total Remittance Market Size(World Bank) | 457,000,000 | 429,000,000 | 453,000,000 | 501,000,000 | 531,000,000 | 551,000,000 | 582,000,000 | 608,000,000 | 636,000,000 | 667,000,000 | ||
| -6.1% | 5.6% | 10.6% | 6.0% | 3.8% | 5.6% | 4.5% | 4.6% | 4.9% | ||||
| Total Remittance Market Size To Developing Countries(World Bank) | 324,000,000 | 308,000,000 | 332,000,000 | 372,000,000 | 400,000,000 | 414,000,000 | 435,000,000 | 454,000,000 | 475,000,000 | 499,000,000 | ||
| % Increase | -4.9% | 7.8% | 12.0% | 7.5% | 3.5% | 5.1% | 4.4% | 4.6% | 5.1% | |||
| Cost of sending Remittances % of Value Sent (Using US$200) - AVG | 9.8% | 8.9% | 7.9% | |||||||||
| Cost of sending Remittances % of Value Sent (Using US$200) - WAVG | 8.7% | 6.6% | 5.7% | |||||||||
| Total Remittance Size x Cost of sending Remittances - WAVG | 39,759,000 | 36,366,000 | 33,174,000 | |||||||||
| Total Remittance Size to Developing Countries x Cost of sending Remittances - Average | 31,752,000 | 36,846,000 | 34,365,000 | |||||||||
WU:
- Dominant MT provider.
- Highest price by 20-30% in most corridors.
- 3x larger than MGI in terms of $ Volume of Money Transfers
- 8.6x EBITDA (significantly higher than MGI).
RIA: Owned by Euronet which is $2.8B market cap and $2.8B Enterprise Value. They charge the lowest fees of any traditional MTO.
- Lowest price in many corridors; their US-to-Mexico is ~60% cheaper than MGI.
- Walmart partnered with them in April 2014 to provide private label Walmert-to-Walmart US for <$900 transfers, at a 35-40% discount to MGI’s then prices. MGI lowered US-to-US prices by WAVG 34% on 10/31/14 as a result.
- MGI’s contract (signed in 2012) with Walmart US expires in April 2016. Allowed Walmart to have private label in US-to-US but not US-to-Intl. When possible Walmart could potentially partner with RIA on Walmart to Mexico. Company won’t comment on US-to-Walmart Intl (particularly Mexico).
M-Pesa: Launched in Kenya in 2007 and Tanzania in 2008. M-Pesa allows users with a national ID card or passport to deposit, withdraw, and transfer money easily with a mobile device. .16% to .66% fee for money transfers. As at November 2014, MPesa transactions in Kenya for the 11 months of 2014 were valued at KES. 2.1 trillion, a 28% increase from 2013, and almost 1/2 the value of the country's GDP. As of May 2013, M-Pesa in Tanzania has five million subscribers. It has since expanded to Afghanistan (2008), South Africa(2010), India(2011) and in 2014 to Eastern Europe.
- As of September 2014, M-Pesa had nearly 16 million active customers who make in excess of €900 million (US$1.2 billion) worth of transactions per month, and the service has approximately 165,000 authorized agents worldwide.
- Partnered with Moneygram on 2/11/2014 allowing sends from MGI to M-Pesa.
- Partnered with WU in 2011 allowing sends from WU to M-Pesa.
- M-Pesa is probably the biggest risk to MGI/WU in the long term. In the past M-Pesa was only for domestic transfers. However, on 3/9/2015 they announced cross-border transfers possible between Kenya and Tanzania, at a cost of 1% + undisclosed FX fees.
XOOM: IPO’d in February 2013. Has a $573M market cap and $422M EV despite only $159M in revenue and $10.5M in EBITDA in 2014. FY 2015 Guidance of $190-195M of revenue and Adjusted EBITDA of $20-25M. Claims to have ~8% market share in the corridors it exists in. XOOM’s offering is Online-only to bank account. MGI has competitive pricing with XOOM for online-to-bank account. But it additionally has online to physical location (no bank account) and it's main focus (and where the highest margins are) is physical location to physical location cash transfers. So while XOOM will have some impact and is growing quickly, it is currently small, doesn't offer cheaper prices, and doesn't compete with MGI/WU on their main (high-margin) business serving the unbanked (cash based) customers.
Thesis/Valuation:
There are a number of near term issues with MGI and long term issues in the industry (money transfer prices will continue to decline over time). But given their low valuation, both absolute and relative to WU, I think the issues are more than priced in. MGI should be able to achieve high-single-digit+ revenue and mid-single-digit ebitda growth again starting in 2016 and will likely continue to repurchase shares.
Valuation: MGI should generate $250M+ of EBITDA and $60M+ of FCF in 2016 after a number of one-time items are gone. At 6.5x EBITDA and 12x FCF MGI would have 50%+ upside to $12.50+.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Return to high-single-digit+ revenue growth starting in Q4 2015.
Continued share repurchases.
Possible additional recoveries on past securities losses.
Possible acquisition target by a larger competitor (Euronet or WU).
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