Net 1 UEPS Technologies (UEPS) has developed a proprietary electronic payment system that addresses the needs of four billion under-banked people. UEPS enables individuals with limited bank access to transact electronically. Net 1’s technology is widely used in South Africa, where its smart cards distribute pension and welfare payments to 3.5 million people, and it processes 60%-plus of retail transactions by volume (EasyPay).
UEPS smart cards operate online and offline. UEPS users can transact in remote areas whenever a portable smart card reader is available. UEPS is used to process transactions in banking, retail, government, education, healthcare and telco.
We find UEPS to be an idea worthy of closer consideration, not only because Charles de Vaulx increased his investment in the company by 53% during 1Q11 and now owns 20% of the equity.
UEPS is a profitable company with recurring revenue streams that trades at roughly 5x EPS. The reason for the low valuation is clear: Investors are afraid that UEPS may lose a contract to process pension and welfare payments on behalf of the South African government (44% of run-rate revenue).
The South African Social Security Agency (SASSA) is in the process of conducting a tender for the business currently done by UEPS. The tender has been on and off for quite some time, but it looks like it may be completed by October 2011. It appears that the market is valuing the SASSA deal at zero (or less), so a resolution of this uncertainty may be good for UEPS either way. Importantly, we do believe UEPS is highly likely to retain the SASSA deal, likely at somewhat lower margins.
We highly recommend listening to UEPS' Q1 earnings conference call, in which founder and CEO Serge Belamant discusses SASSA as well as certain other aspects of company value. Belamant struck us as rather confident regarding UEPS' prospects for winning the SASSA tender.
Other than the SASSA deal, UEPS owns valuable businesses as a merchant processor in South Africa (No. 1 market share) and Korea (No. 2 market share). UEPS also has several smaller growth businesses and ample global growth opportunities in payment processing for under-banked populations.