NET 1 UEPS Technologies (UEPS)

Another one of my favorite stocks is UEPS -- I think they will triple their earnings over the next 5 years (25% CAGR) potentially driving the stock to the $80 level from its current $25. This company has multiple growth engines; is very profitable and yet a near term issue is holding the stock back.

Description: They provide an offline smart card payment system -- offline in that the merchant and the user do not have to have a communication link -- just once a day the merchant has to connect to UEPS' systems to settle up. The smart card readers run on batteries -- which is necessary in the rural areas of South Africa. UEPS makes money by charging the government to load welfare payments on to card accounts; the transaction fee when the card is used with a merchant; loans, insurance, bill payment can be done through the card account -- each with fees; other services including distributing medicines can be done due to the 10 finger finperprinting security system which keeps out fraud.

Growth engines:
1. number of people getting welfare payments and the amount of payments in SA is going up -- driving fee growth.

2. the more often the cards are used to buy from merchants rather than just to get cash the more often UEPS receives transaction fees.

3. Wage payments in SA required a banking license, which they have just acquired, so now they can offer a payment system to employers that does not involve cash -- that drives fees for loading payments, also drives transaction fees for when the cards are used to buy things. The potential is equal to the current size of the company.

4. New countries: -- Nigeria has 3 times the population as South Africa -- that means potential for a lot more cards. includes more than just payments -- will offer financial services through card. Also have several other countries including Botswanna, Nambia, Ghana, etc. and going after more.

5. Growth in other services -- easy pay and VTU -- in other countries (came from Prism deal). VTU is about prepaid wireless services while easy pay is an online payment service within SA to complement the offline nature of UEPS.

Say there is 3 billion people that are unbanked or underbanked in the world because they are too poor to afford banking services. UEPS offers a low cost solution to provide financial services -- electronic based -- to these people and even if they just get 1-2% share of 3 billion people that's equal to 30-60 million smart cards vs. their current user base of 3.8 million cards.

Profitability: initial set up costs but once the network is in place the operating leverage is huge -- little incremental cost while rising usage drives rising revenues --- margins run in the 40% range. They may dip as new countries are added but as those countries grow users, the margins will return. cash flow requirements are low -- again some start up costs but then all free cash flow. new countries are generally 50% ownership with local banks owning the remaining 50%. UEPS also sells the technology that is used to operate the network.

valuation -- less than 18 times FY 08 (Jun) estimates. Growth in 2007 is estimated to be low teens in US dollars but in SA Rand, the growth is closer to 30%. The rand fell vs. the dollar during 2H of 2006 and 1H 2007 (ie. FY2007) but the Rand has been flat to the dollar for some time now -- meaning we are about to anniversary the decline and once we do our growth comparisons will change -- the gap between dollar growth and rand growth should close.

Catalyst -- the stock is being held back because the SA government has a RFP out for a welfare payment system to cover the entire country -- right now UEPS has 5 of 9 provinces and this represents about 70-75% of UEPS' revenues. IF UEPS loses this contract, the company will shrink dramatically. However, odds are very hight they will at least keep their 5 provinces and may actually win other provinces. They are politically connected, their system is the lowest cost and provides the best service to the welfare recipients. There is no reason for UEPS to lose. Within the next week the government is expected to announce their decision -- I expect UEPS to win at least their 5 provinces but the removal of the risk should lead to a sharp jump in the stock to the low 30's or at least a 20% gain.

Given my robust outlook for growth and the low valuation, even if you wait until after the big risk is resolved, there is still lots of potential -- again my view is $80 in 5 years.