Friday 1 May 2015

Western Union (NYSE:WU; Price= $15.51; Long call with target price=$19.64; P/E=10.9; P/B=7.76) – 16 Oct 2014, With vested interest since Feb 2015.

Business Model: To send money efficiently and cheaply around the world with 510K locations. C2C represents 82% of revenue, geographical diversification of revenue split across Europe(22%), North America(19%), Middle East and Africa(16% with 6% growth YoY),Asia Pacific(12%), Latin & Central America(8%) and WesternUnion.com (4%, C2C E-commerce, with 31% growth YoY in digital expansion). C2B contributed 10% of revenue and Business Solution represents 7% of revenue.

Investment Thesis: 1) Price is low due to worry of compliance cost(4.5% of its revenue), but cost will be normalized in the future(FY14 guidance=3.5% to 4.0% of revenue), other competitors might not be able to compete due to non-compliance issue(country specific) like adhere to money laundering(for e.g. Barclays exited money transfer business in Jul 2013), therefore strong economic moat will most likely enhanced in future due to regulatory moat as shown by past average 5 years ROC = 643.5% 2) shareholder friendly; generate around $1.1b of operating cashflow, with 61% used to do stock repurchase and dividend payback 3) Strong distribution network, with more than 510K locations worldwide, emerging market would still need brick and mortar store to receive physical money with flexibility of doing price adjustment if there is a competition, 4) e-commerce segment is growing, as well as Business Solution segment(average 10% per quarter), 5) potential growth in India, China, Mexico and the Philippines with workers needed to send money back home. Remember spending money using credit card (value for purchased items are relatively lower) and transferring money(notional maybe large) are two different things. Need lower transaction cost, network effect(brick and mortar), compliance and reputation(163 years of history) to be in money transfer business.

Profitability & Financial Ratio:

2009
2010
2011
2012
2013
TTM
2009-2013 CAGR
Revenue(USD mil)
5084
5193
5491
5665
5542
5587
1.74%
Gross Margin(%)
43.45
42.64
43.51
43.61
41.63
41.13
-0.85%
Operating Margin(%)
25.23
25.04
25.22
23.48
19.98
19.4
-4.56%
Net Margin(%)
16.7
17.52
21.22
18.11
14.41
14.04
-2.91%
Asset Turnover
0.79
0.68
0.65
0.61
0.57
0.56
-6.32%
Equity Multiplier
20.77
13.60
10.13
10.06
9.16
9.23
-15.11%
EPS(diluted)
1.21
1.36
1.85
1.7
1.43
1.44
3.40%
Free Cashflow per share
1.64
1.32
1.6
1.51
1.51
1.52
-1.64%
Number of shares(mil)
701
668.9
634.2
607.4
559.7
539.9
-4.40%
Dividend yield(%)
0.53
1.30
1.63
2.77
2.93
3.00
40.77%








EV/EBIT
11.15
10.21
8.8
7.55
10.44
          6.32

ROC(%,Greenblatt definition)
646.85
648.75
701.98
674.78
545.52
526.96

Price to Free Cash Flow
8.93
14.07
11.41
9.01
11.35
        10.31


Peer analysis: Xoom is operating on an online model only, trading at x128.7 P/E; Moneygram traded at 5.78 EV to EBIT but with lower net margin of 7.29% and only 300K locations. Euronet has less than 150K locations.

 TTM
Western Union
Moneygram
Xoom
Euronet
Revenue(USD$mil)
5587
1516
140
1485
EV/EBIT
6.32
5.78
75.84
19.51
ROC(%)
526.96
4.85
14.25
112.36
Net Margin(%)
14.04
7.29
2.9
6.36
Asset Turnover
0.56
0.31
0.49
0.91

Valuation: Traded at 6.32x EV/EBIT(10 years EV to EBIT range: 5.3 to 19.9); 10.31x P/FCF(10 years P/FCF range =6.69 to 28.69). Using earnings power valuation with no growth assumptionà27% upside from current price

EBIT Margin average for the past 5 years
0.230811


Average Sales for past 5 years(mil)
5404


Average EBIT(mil)
1247.304
Required Return of Equity
9.00%
- Current interest(mil)
174
Forecast equity value(mil)
10603.38
- Current tax(mil)
119
Amount of outstanding share(mil)
539.9
Add: 3 years R&D
0


Earning Power(mil)
954.3039
Fair value of share(US$)
19.64

Risk: Low revenue growth; earnings hurt from strong USD in short term; competition from Peer to Peer transfer and Mobile Payment; economy downturn causes worker to lose job and then sending less money back home. However operating margin maybe able to improve to 25% once the compliance completed, thus offsetting the low revenue growth, with added bonus from digital expansion in C2C channel.

Summary: Buying a high ROC (due to regulatory moat and no high capex needed) company with a cheap price(temporarily low due to compliance cost) will offer decent return in a long run.(credit to Joel Greenblatt). Notable guru holdings: David Abrams(used to work with Seth Klarman, 26.31%), Charles Bobrinskoy(Ariel Focus,4.8%), John Rogers(Ariel Appreciation, 4.51%)