In October and November of last year, I wrote a series of three articles (here, here and here) which outlined my short thesis on Net1 UEPS Technologies (TICKER: UEPS) ("UEPS" or the "Company"). My bearish outlook for UEPS's business was due to a variety of factors. First, I estimated that the Company would soon lose approximately 70% of its FY 2015 revenue base due to the upcoming SASSA contract expiration in March 2017. In addition to potentially losing 70% of its revenue base, I was also concerned over the questionable conduct of management (e.g. allegations of bribery, taking advantage of grant beneficiaries) during their handling of the SASSA contract. Finally, I argued that UEPS management simply cannot be trusted to run the business in a transparent and truthful manner. For example, on several occasions, CEO Serge Belamant has publicly made misleading and untruthful statements about his business.
Over the past two weeks, I have uncovered a substantial amount of new information which further supports my bearish views on the Company. To begin this article, I will discuss troubling new information which further call into question the credibility of the Company and its management team. More specifically, I discovered that the recent controversy surrounding the Company's handling of the SASSA contract is not an isolated incident. Instead, it appears that controversy has surrounded the Company for most of Serge Belamant's tenure as CEO (1989-Present). As I will document in this article, the Company has had to defend itself against numerous allegations of unlawful and unethical behavior over the past 17+ years. To conclude this article, I will discuss the recent liquidation of a large amount of shares by International Value Advisers ("IVA"), the Company's largest shareholder. In my opinion, the aggressive selling of shares by IVA is a strong indication that they have lost confidence in the Company's future prospects. Overall, the Company's long history of questionable conduct and recent liquidation of shares by key stakeholders further support my belief that UEPS shares should not be held at any share price.
A Little Background Information
Before discussing the new information that I have uncovered, I will first provide what I feel is some necessary background information on the Company's history. I believe that this background information will make it easier for readers to follow along with the rest of the article below.
In regards to the Company's formation, Mr. Belamant founded Net1 Applied Technologies in South Africa in 1989. At the time of its founding, Net1 Applied Technologies was also known as "Aplitec." Eight years later, in 1997, Mr. Belamant also founded a US-based entity called Net1 UEPS Technologies which was basically a developmental stage shell company trading on an OTC exchange. After trading on the South African JSE for a number of years, Aplitec made the decision to seek out a new investor base by moving its stock to a US exchange. Aplitec accomplished this by completing a reverse merger with Net1 UEPS Technologies in June 2004. Following the reverse merger, Aplitec officially renamed itself to Net1 UEPS Technologies. Then, in 2005, the Company completed an initial public offering and moved to the NASDAQ. Finally, in October 2008, the Company relisted on the JSE stock exchange. As of today, the Company currently maintains a dual-listing on both the JSE and NASDAQ exchanges. More details on UEPS's corporate history can be found here.
Another aspect of UEPS's history that I feel needs to be clarified is its involvement with the South African social grant payments program. UEPS has been responsible for distributing social grants in certain provinces of South Africa since the early 2000s. The Company has administered the distribution of grant payments via its subsidiary, Cash Paymaster Services ("CPS"). Prior to winning the 2012 SASSA tender, UEPS was one of three vendors responsible for distributing social grants in South Africa. However, a few years ago, SASSA made the decision to consolidate all of the grant payment responsibilities from three vendors to just one. Thus, when UEPS won the 2012 SASSA tender, the Company gained control over the entire social grant payments system in South Africa.
Bribery Allegations Go Well-Beyond the 2012 SASSA Tender
During my research, I was troubled to discover that almost all of UEPS's tender awards have been tainted by allegations of bribery. The first documented bribery allegation against UEPS that I was able to find occurred almost sixteen years ago. In early 2000, it was alleged that Cash Paymaster Services ("CPS"), a subsidiary of UEPS/Aplitec, had paid bribes to Prince Gideon Zulu, the Welfare and Population Development Minister of the South African province of KwaZulu-Natal. At the time, CPS had recently renewed a contract with the KwaZulu-Natal department of welfare to distribute social grants in the province for another three years. The following excerpt from an April 2000 Citypress article provides further detail on the Prince Zulu ordeal:
"It is alleged Zulu has been receiving regular payments via his daughter from Cash Paymaster Services, the security company that delivers the province's state pensions…The allegations surfaced in a Johannesburg paper recently."
"It was reported that CPS had been paying between R5 000 and R16 000 into the bank account of Zuzulwazi Support Services, a company in the name of Zulu's eldest daughter, Dr Gcwalisile Kabanyane…The paper said on one day alone January 14 this year R32 000 passed through the company's accounts, in two instalments of R16 000 each."
Four years later, the Company found itself involved in another bribery scandal. In 2004, the Scorpions (a South African anti-corruption agency) alleged that the African National Congress ("ANC") and former premier Ngoako Ramatlhodi had inappropriately received financial favors from UEPS. These financial favors were received via a CPS-affiliated entity called Nicoh. In exchange for these financial favors, the Scorpions alleged that the government irregularly re-awarded a social grant payments contract to CPS in late 2002. A May 2004 Mail & Guardian article states the following:
"The controversial renewal of this contract, for the payment of social grants in the province, is being challenged in the Pretoria High Court by Van Rooyen and his company, Labat Africa Management Consulting…Labat claims the provincial government irregularly re-awarded the tender, worth about R250-million, to Cash Paymaster Services Northern ("CPS") in late 2002 after a consortium led by Labat had scored higher on tender evaluation criteria."
"It is Nicoh that has been funding the provincial ANC through a "charitable" trust set up to benefit the people and developing businesses in the province. It is also through Nicoh that individual politicians, Ramatlhodi and Mufamadi, are alleged to have benefited."
Yet another bribery scandal hit UEPS in early 2012. This time, a South African official alleged that he had received a bribe offer from CPS during the tender process for a 2008 social grant payments contract. Note that this incident is separate from the bribery allegations levied at the company in relation to the 2012 SASSA tender. A February 2012 Mail & Guardian article provides further detail on the alleged bribe offer:
"Top advocate Norman Arendse has alleged that while he was deliberating on a R7-billion state tender in 2008 he was offered an "open chequebook" bribe by an individual claiming to represent Cash Paymaster Services …Arendse chaired the adjudication committee for the 2008 tender, which was cancelled in November that year on the committee's advice."
Finally, as has been well-documented in the media over the past few years, UEPS was once again accused of bribing government officials in connection with its 2012 SASSA tender win. I will not discuss these latest allegations in detail as I have already touched upon them in my prior articles on UEPS.
Overwhelming Evidence of Mistreatment of Social Grant Beneficiaries
In addition to numerous bribery allegations, I was surprised to discover that the Company has been dogged by various allegations of gross mistreatment of grant beneficiaries for the better part of two decades. The first documented case that I found occurred over 15 years ago. In late 2000, UEPS/Aplitec found itself in hot water due to the death of a 70-year-old grant recipient at a CPS grant pay point in the KwaZulu-Natal province. Prior to the grant recipient's death, many pensioners had complained of unusually long lines and delays at CPS pay points. The following is from an October 2000 news24 article:
"The African National Congress in KwaZulu-Natal on Tuesday said it was shocked by the death of a 70-year-old pensioner at a pension pay point in Durban…Spokesperson Mtholephi Mthimkhulu said staff of Cash Payment Service , the private company contracted to pay pensioners, did not properly arrange the implementation of the new card system for pension payouts."
"Joseph's death followed complaints by pensioners that they are forced to stand in queues for hours to collect their monthly pensions."
In response to the poor conditions and long lines at CPS pay points, a committee meeting was organized in September 2001 by various parties associated with the South African grant distribution program. The purpose of this meeting was to discuss the inadequate service that UEPS/Aplitec was providing to pensioners. The full transcript of this meeting can be found here. In addition to discussing poor service at pay points, the committee spent a great deal of time voicing their concerns to Mr. Belamant over the potential exploitation of grant beneficiaries by CPS through the marketing of third party products and services. Provided below are a few excerpts from this meeting in which the marketing of products to beneficiaries, such as microloans and prepaid electricity, is discussed:
"Mrs Kalyan (DP) asked for clarity regarding the specific products provided by the company…Mr Bellemant responded that 19 products had been introduced…The card allowed holders to pre-pay for water and electricity, for instance. It can also handle payments for cell phone recharge cards. Transportation costs could be paid using the card."
"Mr Salojee (ANC) referred to the mention of the 19 products. He wanted to know whether they had been assessed by any kind of Consumer Protection Organisation. In addition, he wondered whether there was any regulation over the matter. He was also concerned whether the pension salary of R570 every month was sufficient to purchase the wide range of products mentioned."
"Mr Mbadi (UDM) said that some deductions were done without the knowledge of the pensioner, who did not know the amount actually due to him."
As shown by the above excerpts, back in 2001, the Company appeared to be using similar tactics as it does today in order to profit from social grant beneficiaries. This includes the aggressive marketing of microloans and other products to beneficiaries of limited means. It was also alleged that, in some cases, the deductions from beneficiary accounts were done without the beneficiary's knowledge. Thus, it appears that concerns over UEPS's alleged exploitation of grant beneficiaries is not a recent phenomenon.
Unfortunately, the September 2001 committee meeting seemingly did little to improve the quality of CPS's grant payment services. In June 2003, another pensioner died at a CPS pay point. This time it was a 31-year-old woman who died while waiting in line for her grant payment. As a result of this incident, as well as numerous complaints over the poor quality of CPS's service, the Eastern Cape social development department took over the grant payment program in six of the districts served by CPS. These unfortunate events were documented in a July 2003 news24 article:
"The Eastern Cape's social development department has taken over indefinitely the payment of pensions and social security grants in six districts previously served by Cash Paymaster Services ."
"MEC Neo Moerane-Mamase said: 'We agree it was a mistake to take a company that has failed to prove its capability to render quality services. We also apologise for any suffering and ill-treatment.'"
"He was responding to a number of complaints about the service, among them long queues, late arrivals, the length of time taken to process grants and the location of pay points… Criticism of CPS' service came to a head last week when a 31-one-year-old woman died while waiting in line for her social grant."
The final item that I will discuss in regards to UEPS's treatment of grant beneficiaries is the recent suspension of the Company's insurance license. As I discussed at length in my initial article on UEPS, the Company has continued to use questionable and potentially unlawful methods to market products such as microloans and funeral policies to grant beneficiaries. In February 2013, the Company finally faced some consequences for its questionable marketing practices as the Financial Services Board ("FSB") suspended UEPS's insurance license. The FSB claimed that the Company was using its grant pay points to market funeral policies directly to beneficiaries. According to the FSB, this practice of marketing funeral insurance at grant pay points violated South African law. The following excerpts are from a May 2013 Mail & Guardian article regarding the FSB's decision to suspend UEPS's insurance license:
"The Mail & Guardian detailed in September how Net1's plan appeared to flout South African law, Sassa's policy and the terms of its contract with Sassa."
"…in February, in a strongly worded letter seen this week by the M&G, the FSB suspended the licence of Net1 subsidiary Smart Life, which was set up to market funeral policies at grant pay points…Among the regulator's concerns was that Net1, which owns 90% of Smart Life, insisted on using Cash Paymaster's social-grant infrastructure to sell insurance policies."
One More Scandal For Good Measure
Unfortunately for UEPS longs, the Company's questionable behavior extends beyond allegations of bribery and exploitation of grant beneficiaries. During my research, I discovered one other major scandal related to the Company which occurred over 17 years ago. In 1998, Hanoch Neishlos, a long-time business associate of Mr. Belamant, was accused of using university research funds for the benefit of himself and Aplitec. At the time, Mr. Neishlos was a professor at the University of Witwatersrand as well as an executive director at Aplitec. According to an April 1998 Mail & Guardian article, colleagues of Mr. Neishlos at the University of the Witwatersrand claimed that Mr. Neishlos was inappropriately using university funds and resources to develop technology to be used by Aplitec. In other words, Mr. Neishlos was using university resources for the benefit of Aplitec and not the university. As a result of these accusations, Mr. Neishlos eventually resigned from his position at the university. Provided below is an excerpt from the Mail & Guardian article which provides more detail on the dispute:
"A senior academic at the University of the Witwatersrand is poised to resign over his involvement in a publicly listed technology company…Professor Hanoch Neishlos, chair of the computer science department at Wits, and his wife own shares in the company that are currently worth more than R100-million."
"The company's main product is strikingly similar to technology Neishlos is developing at Wits, in a research project partly funded by the taxpayer and run with the help of his postgraduate students."
"Neishlos has also been an executive director at the company, Net 1 Applied Technology (Aplitec), for more than six months. He still draws a salary from Wits."
A Summary of Prior Allegations
The sheer amount of controversies that UEPS has been involved in over the past 17+ years is simply mind boggling. Provided below an extensive list of the various scandals and allegations of wrongdoing that have been levied at the Company over the years.
- 1998 - Hanoch Neishlos, a long-time business associate of Mr. Belamant, was accused of using university research funds for the benefit of himself and Aplitec
- 2000 - In early 2000, it was alleged that CPS had paid bribes to Prince Gideon Zulu, the Welfare and Population Development Minister of KwaZulu-Natal
- 2000 - In late 2000, a 70-year-old grant recipient died at a CPS grant pay point. Some believed that unusually long lines and delays at CPS pay points were partly to blame
- 2001 - During a South African committee meeting in September 2001, committee members voiced concerns over the potential exploitation of grant beneficiaries by CPS through the marketing of microloans and other products
- 2003 - In June 2003, another pensioner died at a CPS pay point. In response to this incident, the government took over the grant program in six of the districts served by CPS
- 2004 - The Scorpions alleged that the ANC and former premier Ngoako Ramatlhodi had inappropriately received financial favors from CPS
- 2008 - In early 2012, a South African official alleged that he had received a bribe offer from CPS during the tender process for a 2008 social grant payments contract
- 2012 - Also in early 2012, the awarding of the 2012 SASSA tender to UEPS was disputed by AllPay. AllPay alleged that UEPS had bribed government officials and that SASSA had run a highly irregular bidding process.
- 2013 - In February 2013, the FSB suspended UEPS's insurance license over claims that the Company was using its grant pay points to market funeral policies directly to beneficiaries
- 2012 to Present - Various media outlets and activist groups in South Africa have continued to voice concerns over UEPS's questionable behavior relating to the marketing of microloans and other products to grant beneficiaries
The next natural question is how legitimate are these claims against the Company? In regards to UEPS's alleged poor treatment of beneficiaries, it appears that there is a good deal of validity to this claim. As discussed, due to poor conditions at CPS pay points, the South African government was forced to take over the grant distribution responsibilities in six districts served by CPS. This drastic action by the South African government provides pretty strong evidence that UEPS was in fact providing a substandard level of service which resulted in dangerous conditions at grant pay points. Also, the fact that UEPS's insurance license was suspended in 2013 brings validity to allegations that the Company was employing questionable and even unlawful marketing practices. Further supporting these allegations is the fact that various activist groups and media outlets in South Africa have voiced concerns over UEPS's questionable marketing of products to beneficiaries.
In terms of the numerous allegations of bribery levied against the Company, I was not able to find any information in regards to the outcome of the bribery allegations levied against UEPS in 2000, 2004 and 2008. These cases are not very well documented online. That being said, the controversy surrounding the 2012 SASSA tender was extensively covered by the media. From the various reports discussing the 2012 SASSA tender, I was able to find evidence which supports the claim that UEPS bribed SASSA officials. For example, John Tsalamandrisa was a SASSA employee who was a member of the bid committee for the 2012 SASSA grant tender. In a taped conversation between Mr. Tsalamandrisa and Roedolf Kay, the head of the SA Older Persons Forum, Mr. Tsalamandrisa expressed his concerns over the corrupt actions that he had observed during the 2012 tender process. The following are excerpts from an April 2013 BizCommunity article which provides further detail on this taped conversation:
"Tsalamandris met Roedolf Kay, the head of the SA Older Persons Forum, at a Spur in Cape Town in March last year, and told him how the tender was "just so blatantly dirty." Kay recorded the conversation and the transcript, submitted to court, makes shocking reading."
"In it, Tsalamandris details how AllPay's scores were lowered, how people connived to exclude AllPay and how key people "took money" in cash."
"Kay eventually filed an affidavit about the conversation, but crucially Tsalamandris himself did not as he was already a witness for his employer, SASSA…He also seemed to fear for his safety."
As detailed in the above excerpts, Mr. Tsalamandrisa alleged that SASSA had taken bribes and had intentionally lowered AllPay's scores relative to UEPS. In my opinion, Mr. Tsalamandrisa's allegations provide strong evidence that UEPS may have been bribing and working with SASSA to ensure that it won the tender. I believe this is a reasonable assertion given that Mr. Tsalamandrisa was so close to the bid process as a member of the SASSA bid committee. Ultimately, the Constitutional Court of South Africa agreed that there was something fishy about the 2012 SASSA tender. Although bribery was never legally proven, the Constitutional Court ruled that the SASSA bid process was "highly irregular" and ordered SASSA to retender the contract.
In summary, as outlined in this section, I believe that there is a good deal of legitimacy to the numerous allegations that UEPS bribed officials and mistreated grant beneficiaries. Although there is little documentation online regarding the legitimacy of the 2000, 2004 and 2008 bribery allegations, there is strong evidence supporting the other allegations levied against UEPS (e.g. bribery of SASSA officials in 2012, poor treatment of beneficiaries). All of this leads to the question of why the South African government awarded UEPS contracts for the better part of two decades despite all the controversy. It is impossible for me to answer this question with certainty. However, I will provide my opinion on this matter in the next section.
So what key takeaways should investors take from this article? First off, given UEPS's involvement in so many controversies, I believe that the Company and Mr. Belamant lack almost any credibility. How can investors trust a Company and CEO who appear to act with such little regard for the law or human rights? Going forward, I find it highly unlikely that Mr. Belamant will run UEPS in a responsible manner and build long-term shareholder value. Instead, I believe it is more likely that a cloud of controversy will continue to surround the Company for as long as Mr. Belamant remains CEO. Thus, due to the Company's severe corporate governance issues, I see no reasonable justification for holding shares in UEPS at any price.
Eventually, I believe that the highly questionable manner in which UEPS conducts business will result in significant liabilities for the Company. Up to this point, the Company has surprisingly been able to escape any major consequences for its actions. However, there are indications that this is about to change. Recently, the Company has come under increased scrutiny from media outlets and activist groups in South Africa. Also, as mentioned in my first article on UEPS, there have been a number of recent investigations into the Company by regulatory groups in both the US and South Africa. Basically, the Company is a ticking time bomb from a regulatory / legal perspective. Any of the current or future investigations into the Company could result in severe liabilities for the business, and in turn a significant decline in equity value. For example, activist groups in South Africa have been demanding that UEPS refund all illegal deductions taken from grant payments. I would not want to own shares in a business with so many legal and regulatory issues hanging over its head.
In addition to potential liabilities from current and future regulatory investigations, UEPS shareholders should also be concerned about the severe damage that the Company has done to its reputation. As I have previously discussed, I estimate that UEPS will likely lose almost 70% of its revenue base when the SASSA contract expires in March 2017. Thus, the Company will need to secure a significant amount of revenue from new clients in order to keep the business profitable. Given UEPS's history of poor conduct and the increasingly negative publicity surrounding the business, I believe that it will be very difficult for the Company to secure new business. For example, Vodacom publicly distanced themselves from UEPS when it was discovered that UEPS was using Vodacom-supplied SIM cards to help carry out its Umoya Manje SMS marketing scheme. The following excerpts are from a May 2014 Mail & Guardian article which describes the Vodacom controversy in more detail:
"The South African Social Security Agency (Sassa) and its agent, Cash Paymaster Services , are railroading state welfare recipients into using Vodacom SIM cards through an exclusive partnership between the two companies…it appears that Net 1's plan is to push microloans, funeral insurance and airtime at welfare recipients using the Vodacom numbers."
"Vodacom spokesperson Richard Boorman distanced the company from Sassa. "After they won this tender, Net 1 ... asked [us] to become a dealer so they could distribute our SIM cards the same way we would supply them to any other dealer. We're purely a technical partner.""
The Vodacom ordeal is just one example, but it provides a good illustration for why UEPS will likely have trouble securing new clients and business partners. Quite simply, nobody wants to work with someone whom they cannot trust. This is especially true in more developed countries which have greater sensitivity to corruption. UEPS has stated that one of its major growth initiatives is to expand its business in developed countries like the UK and US. In fact, the Company has moved a number of key executives to its offices in London. This is a curious move for the simple fact that the odds are quite low that the US or UK business community and government will ever embrace a company as controversial as UEPS. Thus, I believe the Company's international expansion efforts have little chance of success.
Finally, I am quite puzzled as to how UEPS has continued to win social grant tenders despite its less than stellar service record. As mentioned previously, in 2003, the South African government took over the grant program in six of UEPS's districts due to poor conditions at grant pay points. Despite UEPS's failure to deliver an acceptable level of service, the government inexplicably re-awarded the social grant tender to the Company when the contract came up for renewal. How does this happen? Given that almost all of UEPS's tender awards have been tainted by allegations of bribery, I believe that there is a good chance the Company has used unlawful methods to help secure contract wins. It is the only reasonable explanation that I can come up with for why the government keeps handing UEPS business. The fact that UEPS may have used bribes as a means to help win social grant tenders over years is not a positive sign for the future viability of the business. It may mean that UEPS cannot compete based solely on its capabilities. This casts further doubt on the Company's ability to gain enough new clients to sufficiently offset the upcoming expiration of the SASSA contract.
Largest Shareholder Is Aggressively Liquidating Shares
For many years, International Value Advisers has been the largest shareholder in UEPS. However, based on recent activity, it appears that IVA is rapidly losing confidence in their investment. Provided below is a table which shows IVA's share ownership in UEPS as provided in its last three 13G filings:
As shown in the table above, over the past year, IVA has reduced their holdings in UEPS by 45% from 12.8mm shares (27.6% ownership) as of Feb 2015 to 7.1mm shares (14.9% ownership) as of Feb 2016. The fact that IVA has sold almost half of their holding over the past year is a concerning development for shareholders. Also noteworthy is the fact that IVA has continued to sell large amounts of shares during a time when UEPS's stock price has been in freefall. Based on IVA's Oct 2015 and Feb 2016 13G filings, IVA sold a total of 1.3mm shares between Oct. 6th 2015 and Feb. 8th 2016. The continued dumping of shares by IVA near 52-week low stock prices is a strong indication that the firm has lost a good deal of confidence in UEPS's future business prospects.
My Interaction With Investor Relations
I would like to note that I reached out UEPS's investor relations team via email. I asked them for their feedback on the various issues which I have outlined in this article. If I receive a meaningful response, I will provide an update in the comments section.
Given all of the major controversy which has surrounded the Company for almost two decades, I am shocked that UEPS has been able to escape any major consequences. That being said, the upcoming SASSA contract expiration, as well as increasing regulatory scrutiny strongly indicate that the good times are about to end for the Company and Mr. Belamant. At the end of the day, UEPS shareholders must ask themselves whether it is worth the risk to hold shares in a company that appears to be relying on unlawful and unethical practices to sustain its business. In my opinion, the answer is undoubtedly a resounding "No". Based on the large reduction in IVA's UEPS ownership stake over the past year, it appears that IVA may have also reached the same conclusion. Thus, despite the recent large decline in share price, I continue to believe that UEPS represents a tremendous short opportunity at the current share price level.
Disclosure: I am/we are short UEPS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.