UEPS seems to have a good product for WAYO Land...
Africa the Next India
By James Altucher
RealMoney.com Contributor
6/30/2006 7:22 AM EDT
Africa is the new India. But as happens in emerging markets, there's a matter of perception vs. reality.
Quietly, the political situation in Africa has been improving, with only 11 out of 53 African countries still having governments that came into office without due process. Furthermore, while many people perceive Africa as plagued with famine, economic decline and wars, the reality is that seven of the 20 fastest-growing economies in the world are based in Africa.
For instance, in U.S. dollars in 2005, Egypt's stock market was up 158%, Zambia's was up 111% and Uganda's 71%. Additionally, there has been little correlation between the African markets and the U.S., as the correlation coefficient between the Africa All-Share index and the S&P 500 is -0.05.
Right now, I think the best bet on Africa is Net 1 UEPS Technologies (UEPS) . The company uses its universal electronic payment system (UEPS) to provide smart card technologies and systems for the larger population of southern Africa without access to banks.
These UEPS systems are unique in that they operate offline, meaning they don't need to be connected to a centralized system or network, as credit and debit cards must be in the U.S. This UEPS technology is perfect for southern Africa due to the lack of computer saturation, which makes it difficult for traditional credit/debit card services to operate.
Furthermore, the company provides various financial services to card-holders that would otherwise be very difficult to provide without UEPS technologies. Some of these services include micro loans, insurance and the distribution of food channels. For example, UEPS technology is perfect for the insurance sector of the region. While many companies that provide insurance to African customers struggle because of the "limited penetration of bank accounts," according to research by the FinMark Trust, the UEPS technology allows for automatic, predesignated deductions from a person's smart card.
The technology has plenty of room for further saturation, providing a source of future growth.
First, the company is focusing on building out its infrastructure in other African countries. These countries include Malawi, Mozambique, Zimbabwe, Ghana, Rwanda and Burundi.
Next, the company just signed an agreement to entered Nigeria, a market with four times the population of South Africa and a huge private-pension market. ( Click here for more information.)
Also, the company should acquire a banking license for wage payment within the next six months. The South African wage-payment opportunity doubles the market size while adding a limited amount of infrastructure. This wage system is also much more profitable than the welfare system, because there are currently 5 million cash workers earning three times the amount of social-welfare beneficiaries. In addition, the company will be able to further leverage its technology, because it is not only perfect for payments and purchases, but also is dynamic enough to operate in banking, health-care management, international money transfers, voting and identification.
As testament to the card's extensive biometric security, here is the process that a new cardholder goes through:
1.All 10 fingers are captured, with three fingerprint images captured per finger.
2.The three fingerprint images for each finger are consolidated and filtered to create the best image for that finger. This results in 10 high-quality fingerprint images.
3.The 10 fingerprint images are scored, and the four highest-scoring images are used to generate fingerprint templates. A fingerprint template is a unique geometric representation of one fingerprint.
4.The cardholder is verified against these four templates using the highest fingerprint-matching threshold to ensure the best recordation process. This process helps to eliminate the false rejection of genuine cardholders due to initial bad fingerprint template recordation.
5.The four fingerprint templates are signed by an "issuing UEPS smart card" and stored on the cardholder's smart card.
There are two significant short-term catalysts. The first is the rebalancing of the Russell, to which the company is being added. By June 30, an additional 3 million shares of UEPS must be added to the Russell. Considering UEPS trades, on average, fewer than 225,000 shares per day, this should propel the stock higher. Secondly, UEPS has beat analyst EPS estimates the last three quarters. While I can't say with confidence that it will again surpass EPS estimates, I do believe the company will beat the analyst consensus for EBIT (too bad no one on Wall St. cares about this, even though it makes more sense and is less manipulated by accounting nonsense), as analysts are currently modeling 44.2% EBIT margins, which I believe are low, considering the company did 44% in the comparable quarter last year. In fact, I believe EBIT margins are set to rise more than 20bps, as they rose 190bps year-over-year last quarter.
Couldn't be any more bullish? Try again. The balance sheet is stellar, with almost $200 million in cash, and in my opinion, the valuation is very fair. For example, the EBIT margin has increased to 46% in 2005 from 25% in 2002, and I expect this margin to expand to roughly 51% in fiscal year 2007. In addition, I expect sales of more than $220 million in fiscal 2007.
This would produce roughly $115 million in EBIT. Assuming my conservative assumptions are correct, the company is currently trading for about 10 times next year's EV/EBIT, or a 10% pretax earnings yield. For a company with the growth and macroeconomic upside, I am happy to receive an earnings yield almost twice the benchmark treasury.
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