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Net1 UEPS Technologies: New Legislation Spells Trouble For UEPS

Summary

According to recent media reports, the South African government will soon pass new legislation which outlaws the direct deduction of payments from grant beneficiary accounts.

As a result of this new legislation, UEPS’s microlending and Umoya Manje businesses will likely struggle to survive.

Due to the loss of these business lines, I estimate that UEPS’s annual EPS will decline ~50% (Microlending and Umoya Manje contributed an estimated $1.17 of EPS in FY 2015.

A recent media report has claimed that UEPS created Easypay Everywhere for the primary purpose of circumventing the new legislation and continuing its exploitation of beneficiaries.

UEPS remains an attractive short at the current share price level.

Last week, in an article posted by Quoth the Raven, it was revealed that the CEO of Net1 UEPS Technologies ("UEPS" or the "Company") (TICKER: UEPS) may have lied about his PhD degree. A couple days later, on February 25th, the Company's board of directors released a statement which verified that the PhD was in fact from a fake university. This latest revelation confirms my belief that the Company and management have almost zero credibility.

Unfortunately for UEPS shareholders, the bad news does not end there. Last week, the South African government announced new legislation (to be passed next month) aimed at protecting the accounts of grant recipients from the unscrupulous business practices of UEPS. The new legislation will criminalize the direct debiting of payments by UEPS from beneficiary accounts. Surprisingly, it appears that this significant regulatory change has gone unreported in the US. As a result, it is likely that not many US investors are aware of this negative development for UEPS's business. As I will discuss in this article, this new law will likely result in a severe reduction in UEPS's microlending and Umoya Manje businesses. Without direct access to beneficiary accounts, I believe that the vast majority of the revenue and profitability of these two businesses will soon go away. As a result of the loss of these two business lines, I project that UEPS's annual EPS will drop by around 50%.

To finish this article, I will discuss the Company's Easypay Everywhere ("EPE") initiative. On the surface, EPE appears to be a fairly traditional and noncontroversial retail bank serving the underbanked market. In reality, it appears that EPE is simply a vehicle designed to circumvent the new legislation and continue taking advantage of beneficiaries. Recently, nonprofit groups have started to voice their concerns over the questionable practices of EPE. Thus, it is likely only a matter of time before the South African government once again cracks down on UEPS.

A Quick Refresher on UEPS's Microlending And Umoya Manje Businesses

Before discussing the new legislation and its impact on UEPS's financial performance, I think it would be helpful to provide readers with a refresher on the Company's microlending and Umoya Manje businesses. Over the past few years, these two businesses have grown at a rapid pace and have quickly become two of the largest contributors to UEPS's revenue and profitability. On a combined basis, microlending and Umoya Manje revenue accounted for 27% of the Company's total revenue and 69% of Financial Inclusion revenue in FY 2015. Provided below is a breakdown of the Company's FY 2015 revenue by segment:

UEPS's microlending business is based on providing microloans to grant beneficiaries in exchange for a service fee. The Company collects repayments for these loans by directly deducting the owed amount from a beneficiary's monthly grant before it is paid out. The following quote is from a May 2014 Mail & Guardian article which outlines how a typical loan is structured:

"No interest is charged on these loans, just service fees. But these can add up to 50% of the principal amount over a six-month period. On an R800 unsecured loan, with a repayment period of six months, the service fee is R280 - equivalent to 70% annual interest. A loan of just R200 will attract fees of R100 - equivalent to 100% annual interest."

Like the microlending business, the customers of Umoya Manje are almost entirely grant beneficiaries. The Company markets Umoya Manje products like prepaid airtime and prepaid electricity directly to grant beneficiaries via a cell phone text message marketing scheme. The following is an excerpt from a December 2013 AllAfrica article which describes how the scheme works:

"…they take all the cell numbers of the pensioners that they have from Sassa's database and send them SMSs to convince them to buy airtime from them. The cell numbers' users, i.e. pensioners, have to follow the steps provided by the SMS… they have their details like IDs, etc, from the Sassa database, so if the cell number user accepts everything from the SMS they will automatically pick it up…come month-end they will deduct it from the grant."

As I discussed in previous articles, UEPS has been accused of using highly questionable methods to facilitate the growth of its microlending and Umoya Manje businesses. From a moral standpoint, both the government and activist groups have taken issue with UEPS's attempts to profit from the accounts of grant recipients through the sale of expensive microloans and prepaid airtime. Most of these grant recipients are of limited means and rely on their monthly welfare check for basic necessities. In addition to accusations over immoral behavior, UEPS has also been accused of acting in an unlawful manner. Over the past few years, there has been thousands of complaints over unauthorized deductions from beneficiary accounts for the payment of microloans, prepaid airtime and other products. In addition to this, many published media reports have alleged that UEPS is illegally sharing confidential beneficiary data with its subsidiaries for marketing purposes. Also, some government officials have alleged that the direct debit of payments from beneficiary accounts by UEPS is prohibited by law.

Complaints Over UEPS's Activities Have Recently Increased

Unfortunately, it appears that UEPS's questionable behavior has recently gotten worse. According to a February 2016 IOL article, the number of reported incidences of illegal deductions...


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