Net1 reliance on CPS for profit could slow exit from grants

The extent of Net1 UEPS Technologies’ reliance on the controversial contract with the South Africa Social Security Agency (Sassa) to distribute social grants and generate profits was highlighted in its 2018 earnings outlook.

The US, Nasdaq-listed company expects its earnings per share for the 2018 financial year to be at least $1.61 (R20.99 at time of writing), which is markedly higher than the $0.41 (R5.34) it posted in its quarterly results to end June 2017.

In his first presentation to analysts since taking over from former CEO Serge Belamant, who was forced to retire at the end of May, Herman Kotzé said Net1’s earnings per share target hinges on the effectiveness of its contract with “Sassa for a full year on the existing terms and conditions”.

This implied that it expects the continuation of its social grants contract well into its financial year of June 2018. “We won’t be taking questions on Sassa and Cash Paymaster Services (CPS) due to sensitivities around it,” Kotzé told analysts.

CPS, a subsidiary of Net1, is currently responsible for distributing social grants to more than 10 million beneficiaries. By April 2018, Net1 will relinquish this role as per a Constitutional Court order. The initial contract was declared invalid in 2015 as it didn’t go through proper tender processes. However, the contract was extended for another year in March at the eleventh hour.

The Department of Social Development and Sassa now have seven months to find an alternative solution by either purchasing CPS’s existing infrastructure or by issuing a new tender to the South African Post Office.

Belamant took early retirement – a move market watchers read as him being pushed out for his controversial handling of the contract after Net1’s biggest shareholders, Allan Gray and the International Finance Corporation, called for a board shake up at the company.

Read: IFC, Allan Gray cheer at end to Serge Belamant’s Net1 contract

In addition to Net1’s Sassa contract continuation, its earnings per share guidance is dependant on the rand exchange movements and a US corporate tax rate of between 34% to 36%.

Net1’s revenue grew 3% in US dollar terms to $155 million (R2 billion) for the quarter to June 2017. Taking into account rand strength against the US dollar, in rand terms, revenue fell by 10%.

The group has three divisions: South African transaction processing, financial inclusion and applied technologies, and international transaction processing.

CPS falls into South African transaction processing division, which pulled in revenue of $67.7 million (R882 million) growing by 26% in US dollar terms or 11% in rand terms.

It generated more revenue than the financial inclusion and applied technologies, and international transaction processing divisions, which posted revenue of $56.2 million (R732 million) and $45 million (R586 million) respectively.

Net1 doesn’t separately disclose revenue generated from operations associated with social grants in its transaction processing division, which also includes CPS, its retail card transactions, prepaid electricity and airtime business EasyPay, payroll transaction business FIHRST and others.

Kotzé said the revenue growth for the division attributed to an increase in the number of social grants distributed; higher transactions in the usage of its ATMs; and transaction fees generated from card holders using its ATM infrastructure that is integrated into SA’s National Payment System.

EasyPay clients are also social grant beneficiaries, who are offered transactional bank accounts, add-on services such as micro-loans, life insurance, prepaid utilities and bill payments through their mobile phones and Net1’s network of ATMs.

Net1 is in the midst of restructuring its operations after it acquired a 15% stake in ailing Cell C for R2 billion, as part of the telecommunication company’s recapitalisation.

Kotzé said there was opportunity to integrate Cell C into Net1’s existing businesses such as leveraging EasyPay’s infrastructure and the group’s financial services businesses to provide recharge, prepaid and value add products to Cell C customers. “We can create mobile banking and payment products that can be deployed into other markets,” he said.

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