Dual-listed Net1/UEPS Technologies has managed – so far – to hold on to a controversial five-year contract with the SA Social Security Agency (Sassa) worth R10bn. Net1 is traded on New York’s Nasdaq (primary listing) as well as on the JSE (secondary listing) and develops smartcard-based payment technologies for use in primarily developing countries.
The lucrative Sassa contract, in which subsidiary Cash Paymaster Services will provide payment services for social grants, was challenged by the losing bidder – Absa-owned AllPay – in the North Gauteng High Court. Last month, a judge ruled that the contract was illegal, but it will remain in place to make sure “millions of South Africans continue receiving grants”. (Net1 has since been granted leave to appeal the ruling.) The group must have breathed a heavy sigh of relief, as the deal is set to be a major contributor to its bottom line in the coming year, and Net1 has already spent some R30m on the project. According to Net1’s chief financial officer, Herman Kotze, another R20m will be spent on rollout in the coming months.
The group says it has begun the first phase of the mammoth project, having issued around 2.5m MasterCard-branded debit cards to beneficiaries and re-registering the country’s 9.2m grant recipients. During the fourth quarter of 2012, Kotze said the group incurred “direct implementation expenses” of around $9.1m, as well as capital expenditure of $13m. While many have questioned the group’s “cosy” relationship with Government, Kotze sees the Sassa contract as one of many more local projects to come and views the country as a great “launching pad” for pursuing new business on the continent. Yet Jean Pierre Verster from 36One Asset Management warns that if the dark cloud of corruption currently hanging over Net1 isn’t cleared away, the group will find it difficult to “play fairly and win tenders” in other markets. There is still a possibility, according to Verster, that the Sassa contract might be cancelled if sufficient evidence of wrongdoing is found.
This doesn’t appear to be factoring into the group’s thinking, however, with Kotze sounding bullish on Net1’s prospects on the continent and beyond.
“There are many opportunities that exist across Africa which are ideally tailored for the technology that we offer – where lack of reliable infrastructure, electricity, communications, etc, hinders development,” Kotze told Finweek “In SA, there are some very exciting opportunities. Many people are talking about financial inclusion and addressing the needs of the unbanked, and in our view, we are the only company that can provide the [technical] solutions to this problem.”
Arthur Goldstuck, MD of technology consultancy World Wide Worx, disagrees with Kotze’s assertion that Net1 is the “only” provider able to address SA’s technical shortfalls in the financial environment.
“There’s no technical problem for which one company has the monopoly on solutions,” he explains. “That only happens in tender documents that have drawn on the capabilities of a single provider – not an unusual situation in Africa.”
Goldstuck adds: “The truth is that, just as Africa is many countries, it is made up of numerous payment systems. For this reason, payment solutions that have worked in one country, like Mpesa in Kenya, have not automatically translated into success in another country. Local dynamics and needs combine to require very specific solutions tailored to very specific situations. The key to payment solutions in Africa, as a result, is understanding local dynamics and providing a solution that takes those into account.”
Net1’s black empowerment deal – which it concluded in January – aims to help the group to better manage and understand these local dynamics and ultimately strengthen its African presence. Net1 agreed to sell up to 19.9% of its equity to black shareholders, in a deal worth up to $80m. The leading partner in the consortium is Mosomo Investment Holdings, and Net1 granted the consortium a one-year option to purchase up to 8.95m shares of the company’s common stock with an exercise price of $8.96/share.
“We chose Mosomo for a number of reasons, but mainly because we believe that they have a strong network of partners in SA and across the continent as well,” says Kotze. “They have potential customers who are interested in our technology and can assist us in entering developing markets in Africa and South America.”
Goldstuck believes that Net1 is indeed well positioned to pursue this expansion plan: “The group is already a major player in Africa, and gradually making inroads into global markets,” he says. “If they can keep their reputation clean in SA, they will be a major player here and beyond.”
Net1 also operates in the Republic of Korea, Ghana and Iraq. Kotze says that currently the group derives around 60% of revenue in SA, and the remainder from its international activities – the bulk of which comes from Korea. The group has a market cap of R4.56bn.
From an investor’s point of view, Verster says that the group offers little to no value because of its heavy dependence on the Sassa contract for the bulk of its income. In addition, this contract appears to have been awarded on shaky grounds and might later be handed to another provider.
“There is no diversified spectrum of clients or a diversified business model, so an investor would need a deep discount to make up for that risk,” he explains. “The financial services space is also becoming very crowded [with technology providers], and Net1’s technology is not sufficiently adaptable to the financial sector environment.”
Indeed, Net1 is starting to look more and more like a one-trick pony – and a potentially dirty trick at that.