Eureka ReportOnCard dented but determined By Madeleine...

Eureka Report

OnCard dented but determined
By Madeleine Heffernan
February 6, 2009


PORTFOLIO POINT: Despite changes to the fees in its biggest market, China, the prepaid card issuer maintains a steady profit.
A small-cap stock with big-hitter shareholders and a head-start in the attractive prepaid card market in China is back in the news this week after reporting a 13% profit jump.

OnCard International, which does 80% of its business in China, has had a rough trot over the last year or so as its shares failed to deliver on early promise, falling from more than 60¢ to be trading at a recent low of 8¢. (After spiking to 16¢ after the results announcement, the stock closed the week at 10¢).

Eureka Report subscribers are among those wondering what has happened to the company: after Alan Kohler interviewed chairman Peter Abotomey in February 2007, the company’s share price rose from 21¢ to 42¢ the following day (see Investment aces back OnCard).

OnCard’s half-year results (a $3.21 million profit for the six months to December, with revenue steady at $7.53 million, and cards on issue up 120% to 29 million) are encouraging although hardly exciting.

So, despite signs of life in this high-profile small cap, questions still remain over whether the company – whose register includes such big names as former Patrick chairman Peter Scanlon, Visy’s Dick Pratt and David Calvert-Jones of the Murdoch family – can deliver on its promise.

Peter Scanlon, through FCPB Investments Ltd, has about 27% of the company; Pratt, through Invia Custodian Pty Ltd, has 6.19%; and Calvert-Jones has two million shares or 1.22%. James Packer has also been an investor, but Abotomey is unsure whether he has retained his stake.

OnCard has operations in 40 cities: 34 in China and the rest in Australia, New Zealand, Hong Kong, Singapore and Malaysia. In a joint venture with Shanghai Smart Service Co Ltd, it sells a prepaid cash card called SmartPass to groups, mainly the government, banks and the travel and construction industries. These groups then give the cards to their employees, who then use them at a variety of retailers, such as supermarkets, barber shops and restaurants. There are no personal cheques in China and few credit cards; China’s fringe benefit concession also helps, with about 14% of salaries allowed to be gifted tax-free to employees.

When OnCard sells the prepaid cash cards, it keeps the money on the card and invests it. It also earns a merchant service fee from the thousands of retailers that accept the card. A smaller revenue stream is the ability to claim unspent money. OnCard's China operations and the joint venture contributed a combined $3.23 million profit in the half-year, up from $3.17 million.

"When we first did our business case, we said the return on the float is our core business. The transaction fee we want to cover our operating costs and it does. And we said any expired services would be a bonus," Abotomey says.

“Back in 2004, we worked out that merchant service fees are about 1–2% of transactions, and 4% we thought was a reasonable return on the float, and as best as we could determine, 4% was what expired services are in Western countries.

"What we know now is that those figures don’t correlate exactly with China. What’s happened is we’ve had a better return on the float; the merchant service fee in that period of time, the three years, has been 1–2%; and the expired services would be lower. Overall, we’ve done better than the gross business case, but of the original estimates, some are up and some are down.”



In other words, competition has prompted OnCard to push its merchant service fee to about 1%, down from 2%. While the move has put pressure on margins, Abotomey says OnCard is well ahead of the pack.

"We're clearly number one. There are only three international companies in Shanghai doing this, and all the rest are local Chinese companies but they're all much, much, much smaller."

The main competition in China is French food services and facilities management group Sodexo and hotel giant Accor. Sodexo, described by Abotomey as the "French version of Spotless", has a restaurant-only card, while Accord offers a prepaid card.

The company also earns revenue from the ability to claim unspent money. Tax office advice that OnCard can claim revenue two years after the card has expired, rather than three months, reduced its after-tax profit share by $415,000.

Admitting OnCard’s share price has been “crummy”, Abotomey is nonetheless putting his money where his mouth is: he picked up one million shares at an average of 12¢ this week (after the half-year report was released) to add to the 77,000 shares he bought in October last year.

“Look, the share price – who am I to judge the market? I’ve got a lot of my wealth in the company, and I think it will come good.

“We’re doing OK,” he says. “We’re a long-term growth stock; we have no debt whatsoever, we have about $15 million at bank which we’re going to use for acquisitions. We also have about $200 million cash in China in the joint venture.”

Abotomey insists he hasn't seen a slowdown in the Chinese business, because the card is used as a cash equivalent rather than as credit. "It's not affecting us at all. I think Hong Kong and Singapore are down about 40%, but it virtually didn't change our result. Australia and New Zealand, down a bit. But once again, compared to what we're getting out of our business in China, the other four countries are small."

So despite its solid revenue figures and growth in cards on issue, OnCard ends the week at just 10¢, a long distance from its share price when many Eureka Report subscribers may have bought shares.

And the ambitious company is eyeing acquisitions in the loyalty, payment and reward sector. “We think it’s going to be a good time to buy. How many other companies have got no debt, a business which is actually growing and is on the acquisitions trail?”