On Tuesday morning December 4, 2012 in an SEC filing, Net 1 UEPS Technologies (UEPS) revealed that it's a subject of a bribery investigation on possible violation of the Foreign Corrupt Practices Act involving a contract in South Africa. Shares got slaughtered on the news, closing down 59% on massive volume of 11,885,280 shares, 132 times bigger than the average volume. UEPS revealed they received letters from the DOJ and the FBI about the investigation along with a letter from the SEC stating it is conducting its own "fact-find inquiry" as well.
So UEPS as a stock is a sell never to look back, right? Not so fast. That very well may be the case, but I'm not convinced yet either way, and UEPS may make for a bounce play. This sell-off may be overdone.
This is the second time this year I've heard the term "Foreign Corrupt Practices Act" and "bribery" involving a public company. The first time was revealed earlier this year with Wal-Mart (WMT), against which was accused that "bribery played a persistent and significant role in Wal-Mart's rapid growth in Mexico." The outcome of that case remains to be seen. WMT shareholders may be a bit nervous over the possible penalties and may be watching the UEPS story as it develops to possibly get an idea of what to expect from their case.
So what's so special about a non-householder name that I never heard of before the investigation that would make me want to even consider it now in light of these investigations?
(1) UEPS is now trading at less than half book value. It has over $1.00 per share in cash. Last quarter they had close to $11.5 million in fundamental net income and sales that were close to their market cap. It may be a long time, possibly years, before a final outcome is reached regarding the investigations. Meanwhile, UEPS will likely keep operating and earning generous net income.
(2) UEPS gave guidance of fundamental net income of $1.25 per share. With a stock price in the low $3 range, that's a forward PE of under 3! The street is quite frankly pricing in the death of UEPS. While that's certainly a risk long term as we don't know all of the details yet of the investigations so anything is possible, it would seem at least for the short term that the risk is more than priced in at these levels.
(3) It's hard to imagine UEPS vast business will just suddenly get up and cease considering the size it is in the regions it operates. From the 10K:
"We are the largest provider of third-party and associated payroll payments in South Africa through our FIHRST service that processes monthly payments for approximately 1,250 employer groups representing over 850,000 employees."
"Internationally, though KSNET, the second largest transaction processor by volume in Korea, we offer card processing, payment gateway and banking value-added services in that country."
Furthermore I highly doubt Korea operations would have any impact whatsoever charges related to South Africa. While South Africa is the majority of their business, their non-South-African business is significant and growing at $118 million in sales, up 50% from 2011 while its South African business grew only 3%. UEPS claims in their 10k their market opportunity involves 2.5 billion people worldwide which they have barely scratched the surface of.
Overall, I think investors heard "DOJ, FBI, and SEC" and flew into a panic attack. When investors hear those letters together they are often reminded of Solyandra or even Enron and overreact forgetting even respected companies such as Wal-Mart and Hewlett-Packard (HPQ) have been accused of similar. All evidence points to UEPS otherwise being a very healthy and very profitable and fast growing company with vast opportunity to expand. For investors with an extremely high risk tolerance, look for UEPS shares to make a bounce at some point in the near future.