Don't disregard Net1

2014-09-04 07:19 - *Gugu Lourie
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THIS is a tough time to be a South African tech company – every day new startups pop up to challenge incumbents for market share. It’s even harder for SA tech firms to tackle the highly competitive US market, and not many local companies would dare to venture into South Korea.

But as they say, the exception proves the rule – South Africa’s Net1 UEPS Technologies [JSE:Net1], which facilitates payments between institutions and individuals without easy access to banking services, has managed to crack the US market. Net1 is also doing well in South Korea and in other global markets.

Not so long ago Net1 found itself in a quandary in South Africa arising from a R10bn tender awarded to its subsidiary Cash Paymaster Services by the South African Social Security Agency (Sassa).

Read: AllPay appeals ruling on R10bn tender

The tender was for the distribution of social grants to more than 10 million beneficiaries. The awarding of the tender was successfully contested by losing bidder AllPay, a subsidiary of Absa. The tender is to be reopened.

The controversy around the awarding of the tender has negatively affected Net1's reputation.

Read: Net1 deal chokes after AllPay attack

But all that seems to be behind Net1, which is listed on the Johannesburg Stock Exchange and NASDAQ, making it one of the most accessible South African stocks for US-based investors.

Despite the furore around the Sassa deal, US investors continue to see value in Net1.

Net1’s biggest institutional shareholder is International Value Advisors (IVA), a more than $3bn New York-based investment firm which owns 12.8 million shares, which translates to a 26.7% stake.

US-based General Atlantic, a private investment firm, holds 7.6% interest in Net1 while Philadelphia Financial Management of San Francisco has 3.7%.

New York-based Seawolf Capital owns 2.5% and Boston-based AJO LP has 2% in Net1, and other US investors own small stakes in the company.

This is despite the fact that Net1 has not paid dividends in the past two financial years and intends to retain future earnings to finance expansion of the business.

Only two SA shareholders

But there are only two South African shareholders in Net1. Allan Gray has 8.8 million shares or an 18.3% stake, making it the second-biggest shareholder, and Net1’s black economic empowerment firm Business Venture Investments own an 8.6% interest.

This indicates that there is no appetite from South African investors for Net1 shares. Perhaps its association with the controversial Sassa tender has put a damper on it attractiveness to locals.

Maybe it is time to forget the Sassa tender and focus on the success Net1 is having in other areas. JSE investors and even the public might want to review their passive positions and take an active interest in Net1.

Presently the South African company is creating shareholder value for US-based investment firms and they are benefiting from technology created locally.

The company is operating in the US through XeoHealth, which provides funders and providers of healthcare with an online real time management system for healthcare transactions.

The R7bn firm, which is planning to expand into the UK and other markets, already operates in the US, South Africa, South Korea, India, Malawi and Botswana.

The company has more than 30 million smartcard holders in 10 countries, including 10 million in South Africa.

The cards use Net1’s patented Universal Electronic Payment System (UPES), which facilitates payments between institutions and individuals who don’t have easy access to banking services.

UPES is likely to position Net1 in a way that allows it to expand its footprint and generate more shareholder value.

Over 65% in revenue from outside SA

Perhaps the most underrated aspect of Net1 is the fact that the company now generates in excess of 65% of its revenues outside South Africa.

The company is a leading transaction processor in South Korea, with 225 000 merchants through its KSNET business.  

KSNET, which provides banking value-added services and payment gateways, clearly provides Net1 with an opportunity to globalise its technology and expand into new emerging markets.

The South African-based firm, which employs more than 4 400 people, is also likely to benefit from Net1 Mobile Solutions which is responsible for the worldwide technical development of various web and mobile apps and payment technologies.

In the next few months the company is set to launch a mobile virtual card payment app, known as VCpay, which it says cannot be cloned or compromised. It has already deployed solutions in South Africa, Cameroon, Colombia, Namibia, Nigeria, Malawi and the Philippines, and also operates in the US and India.

Net1 through its subsidiary Easypay operates the largest bank-independent financial switch in South Africa.
The question is whether Net1 will be able to fend off competition from a number of rivals offering smartcard technology.

In South Africa Net1 also faces competition from retail banks and the South African Post Office, which are targeting the unbanked.

That said, for now Net1 has an upper hand with its technology that operates in real time, even in an off-line environment, using biometric identification instead of the standard PIN technology.

 - Fin24

*Gugu Lourie is a former correspondent for Thomson Reuters, Business Report, Finweek magazine and Fin24 (writing a blog titled 'Googled'). He is the editor of techfinancials.co.za. Views expressed are his own. Follow him on #twitter @LourieGugu.


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