|Shares Out. (in M):||56||P/E||0||0|
|Market Cap (in $M):||197||P/FCF||0||0|
|Net Debt (in $M):||49||EBIT||0||0|
Baron Rothschild tells us that we should buy stocks when there is blood in the streets After a 10 year bull market not much blood has been spilled and therefore undervalued stocks are really not all that present. However what we can say is that certain stocks have had the s--- kicked out of them and we believe offer an unusual opportunity.
One stock that we follow has literally had been pummeled and may offer a unique opportunity- Net One-UPS Technologies (UEPS) is a Johannesburg South Africa payments financial inclusion products and services and secure payment technology. Net-One operates market-leading payment processing processes in South Africa and the Republic of Korea. In addition they offer debit, credit and prepaid processing and issuing services for all major payment networks. In South Africa, Net One provides innovative low-cost financial inclusion products including banking, lending and insurance and is a leading distributor of mobile subscriber services. They also have a 15% stake in a leading South African mobile network operator.
Recently UEPS declined over 70% from its 2019 high, most of the damages resulting from the cancellation of contracts they had with the government- the South African Social Security Agency (SASSA).
While it is not all clear that all issues from this action are over, by and large the street apparently has discounted almost all past damages. The company feels that by the end of the June quarter, they will have most of the issue behind them and the clarity to move forward.
A bit of déjà- vu here. Ensco a bankrupt oil equipment company was purchased by Richard Rainwater for "bubkas" in the 1980s with the company and industry at the
time apparently destroyed. The point is they bought rigs so cheaply that they only needed patience and financial reserves. More recently, we purchased Maxwell Technology on a similar basis- little risk (cash almost equal to market price) with interesting products in the pipeline. As long as something, anything, went right we would have an upside. Enter Tesla and the rest as they say is history.
UEPS is made up of several parts and we will attempt to develop at this point an estimated value for arms length transactions.
Looking forward on a pro- forma basis, transaction processing (SATP) should be $130 million with margins of at least 10%, and probably mid-teens and a ebitda of $20 million. Another important part of this story is KSNET, a South Korea payment processor with over 220000 merchants and an estimated $30 million ebidta.
Additionally, Applied Technology (FIAT) is a catchall of miscel fintech generating almost $15 million of ebitda. This, then includes the major operating parts of UEPS
with its significant investment portfolio which recently had over a $300 million value in additional value to be included in the total holdings.
So let us try to bring this all together. Payment processing (think First Data, Visa, Mastercard) with $15 million ebitda and then a discount for foreign entities using a 12 ebitda or $240 million valuation. A Korean payments processor (KSNET) worth an estimated $300 million, adding FIAT with and estimated value of $150 millon and an investment portfolio of $300 or so adds to $990 million on 57 million shares- even taking a substantial discount for emerging market risk shows material value.
The undervaluation of the stock has not been lost on management. After a recent Corporate transaction. the company said "As we continue our corporate strategic review of our entire business, this transaction represents a first step in our goals of strengthening our balance sheet by focusing our efforts on fintech services, and unlocking the value of operating businesses. investment portfolio and quotations". The transaction they were referring to was to reduce the holdings in one of the other subsidiaries (they have several). Plus the company has the opportunity to sell its equity investment holdings or sell its South Korean payment processes among other items and realize sizable dollars which could be used to buy back stock or pay down debt.
Payments processing is a rapidly expanding field throughout the world. Just a week ago. we saw Fidelity National purchase Worldpay for $35 billion. The company stressed that Fidelity has significant relationships with banks in India, Brazil, and southeast Asia. The Economist recently reported that in a UN report that Africa by the year 2025, will have more Africans then Chinese people in the world. Obviously, Africa is a burgeoning emerging market. Fidelity is paying 23 times Worldpay projected 2018 Ebidta or $43 billion including debt- the largest deal ever in the payments industry and that comes two months after Fiserv scooped up rival of Fidelity-First Data-a $22 billion deal. We expect this trend of M&A to broaden, snatching up many foreign payment processors- apparently better and faster to buy, then build a foreign infrastructure.
Thus, we see a UEPS restructuring potentially benefiting from all this M&A. Goldman Sachs recently announced a new venture fund for emerging markets to expand its portfolio around the world. And not to be left out, Africa’s largest firm, South Africa’s Naspers, with almost of $10 billion windfall from selling down merely 2% of its Tencent holdings plans to concentrate on businesses that focus on emerging markets.
Our point is simple- huge stores of funds are available for new investments, joint deals and takeovers.
Quarter ending June should answer many of the questions on restructuring- sale of parts, or investment portfolio
sale and or spinoffs of payments pieces. Downside appears limited.