|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||75||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
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META FINANCIAL GROUP
Financial Group is the combination of a profitable, fast-growing (150% growth TTM)
prepaid card services provider and a poorly run community bank. At a market cap below
$100mm, the company is clearly "undiscovered". The
hidden value within the prepaid business (“MPS”) is far greater than
the value of the community bank (“the bank”) and the current market cap. At
current prices and netting out the bank, it is possible to buy MPS at
cards are the fastest growing sector of the payments market.
While closed-loop giftcards have clearly been growing at extremely high
YoY rates, the bigger opportunity lies in open-loop
cards. While closed-looped cards are only usable within a given store
or network, open-loop cards function like debit or check cards usable
anywhere a Visa or Mastercard is, but
are not linked to a bank account. They are being promoted as a
method to reward or pay employees, monitor healthcare spending, lower
cross-border remittance fees, replace travelers
checks, and provide the unbanked and underbanked with an easy way to
make reservations or shop online. While the Mercator
Advisory Group (one of three specialist consultancies that have put out
research) estimates $150B was loaded on closed-loop cards in 2005, only
$15B was loaded on open-loop cards. Estimates vary, but it
appears the next few years will yield 50% or greater growth in
open-loop cards as various possible uses become mainstream and the US
economy becomes even more "cashless." While fees may seem high ($4.95 card initiation, $2
maintenance fee per month, etc), they are not substantially higher
than your average low balance checking account including ATM
fees. In addition, they offer a payments solution to the unbanked
and underbanked. A rough guess at the
spending power of the unbanked and underbanked would lead to numbers as
large as $1 trillion per year (80mm times $12.5k income per capita).
Shares outstanding: 2.88mm (assuming exercise of 374k options @ 19.88)
Stock price: $30.3
Market capitalization: $87.3mm
Cash received from option exercises discounted by 20%: $5.9mm
Net Market Cap: $81.4mm
MPS is worth at least $110mm ($200mm is my best estimate). The bank is worth $35mm or more.
Due to limited disclose, the economics of MPS are difficult to break down to a very
granular level. In contracts
like the one with Simon Malls, MPS makes money four general ways: 1) interest on no-cost deposit balances 2) card
issuance fees 3) interchange fees and 4) card breakage (cardholder
loses or does not fully empty her card). On a quarterly basis since inception, the segment financials
are as follows (note that their business year ends Sep 30 so the 1Q
sees the swell in Christmas-linked deposits):
Int inc Non-int inc Non-int exp Oper inc Deposits
3Q05: $0.00mm $0.54mm $0.77mm -$0.23mm $ 16mm
4Q05: $0.05mm $1.13mm $1.08mm $0.10mm $ 71mm
1Q06: $0.76mm $1.24mm $1.24mm $0.76mm $104mm
2Q06: $1.23mm $1.50mm $2.19mm $0.54mm $118mm
3Q06: $0.98mm $2.58mm $1.98mm $1.58mm $165mm
4Q06: $1.07mm $2.85mm $2.70mm $1.22mm $163mm
1Q07: $1.39mm $3.46mm $3.95mm $0.90mm $234mm
Importantly, interest income is artificially low because
they book income to that unit at the average rate that the bank
borrows. If MPS earned interest income at the full value of the MPS
deposits, it is likely the interest income figures would be roughly
double these levels. Adjusting for the transfer pricing between the
business segments, MPS would show operating income of roughly $8.5mm
over the last twelve months (average balance of $170mm times 5.25%
short-term funds rate plus non-interest income minus non-interest
expense). Given seasonality and large initial contracts, it is
difficult to tell the expected organic growth rate of the business. For
instance, while 3Q06 and 4Q06 were flat in terms of deposits, it is not
clear to me that the growth rate changed during that period. Another
take on growth going forward comes from Visa: Visa, who refers a
significant amount of business to MPS, expects the open-loop prepaid
market to more than double next year; MPS expects to do better than
MPS's expense structure should scale well. Currently a great deal of the segment's $3.95mm in 1Q07 expenses are employees, and many of these employees are investments in future revenue (and would more properly be capitalized). Of the non-interest expense in the 1Q07, only $1.65mm was related to card processing. The core business of issuing new cards is highly automated, and beyond legal and compliance folks (about 50 of these at MPS) the remainder of employees are either client reps, salespeople, software developers or new business development. The company is working to become a marketer in certain situations so that it can capture a larger portion of the value of these cards in the future. For instance, they currently supply thousands of small banks private label branded prepaid solutions to sell in branches. It isn't clear how much deposit volume this brings, but the terms of these deals are better than deals with Simon Malls and similar large companies with their own marketing. Company management has a long list of projects that will allow them to leverage their position as a leading issuer to add additional services for clients. Furthermore, they are very visible within the industry - there is a prepaid card expo in late February where MPS is one of the four primary sponsors (the other three are Galileo, Visa and GreenDot). http://www.prepaidcardexpo.com/
a positive note, as MPS has brought in low cost deposits the bank has
not expanded the asset side of their balance sheet but rather has
focused on kicking out high cost liabilities. In addition, the
bank recently sold four branches for a slight gain which is a good sign
(they should shut down most/all the branches, in my opinion). One
worry is that, as MPS generates deposits in quantities such that the
bank no longer has any high cost liabilities, they will attempt to grow
the balance sheet through originating more loans. Management believes
they can be appropriately compensated for their risk in writing loans
at a spread to treasuries. I disagree and would prefer to see them hold
safe, liquid, securities.
summary, the bank segment has management that has not shown great skill
in running a bank, but still wants to be running a bank. Furthermore,
the bank appears to display more nepotism than is appropriate for a
publicly held company. The CEO is son of the Chairman. The COO is the
son-in-law of the chairman. While a small cap run as a family business is not
surprising, it is usually not additive to value. Erring on the side of
conservatism, the bank is worth 80% of book.
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