UEPS more info

A few posts ago I commented on what has been a favorite stock of mine -- UEPS -- the South African smart card payment system company. In the last few days the Robert Baird analyst upgraded the stock and today I got the chance to read his note.

He laid out the case including an estimate for earnings in 2012 -- the fact that he feels able to put a number in print for that far out should tell you something about this company vs. most technology companies -- its business is far more predictable than most technology stocks. His 2012 estimate of $4 is very much in line with my own and roughly assumes a 25% growth in earnings annually.

He also estimated how much each of UEPS' new initiatives and growth drivers would contribute to that $4 estimate. The existing SA welfare distribution business would cover almost half -- $1.85. The surprise for me was the 25 cent estimated contribution of the wage payment business and the $1.50 contribution of Nigeria. So in effect the analyst is arguing that the only 2 areas that matter are the SA welfare and Nigeria -- all the rest from wage payment to Ghana to Namibia to Botswanna to all the other areas are barely rounding errors in terms of their contribution to 2012 earnings.

I have seen previous street reports that claimed the wage payment business had the potential to be equal in size to the welfare business! Quite a shock to learn that in 5 years it could only be at a .25 run rate. His estimate is based on 2 million cards generating $2 in operating profit per card per month or about 40% penetration of the total market. I had heard the total market was more like 8 million employees and that they all were paid more than what welfare recipients received (higher fee potential for UEPS). Not sure which is right -- Baird or what I have read previously.

Nigeria is a real risk in that Baird estimates 12 million cards in force in 2012 -- vs. only 3.8 mill in SA. Its quite possible 12 million will prove conservative -- Nigeria does have 3X the population of SA. On the other hand, because the service is only starting this quarter, we have no data on which to base a Nigerian projection. Once December quarter results are reported in early 2008, we should have a good idea of the growth trajectory of Nigeria.

While I knew Nigeria was important, I didn't realize just how important to future growth Nigeria could be to UEPS. 1.50 of $4 in earnings -- and half of the growth between now and then. I am hopeful the company will sign other countries and or that wage payment will be much bigger in size than 25 cents.

still a great story my main concern is timing -- it could take until 2010 or so before the non-welfare businesses are able to contribute a meaningful percentage of earnings.