Net1’s reliance on social grants

SASSA: PROFITS HINGE ON CONTRACT

In addition to its contract continuation, its earnings per share guidance depends on the rand exchange movements.

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

It expects its earnings per share for financial year 2018 to be at least $1.61 (R20.99 at the time of writing) – markedly higher than the $0.41 (R5.34) in its quarterly results to end June 2017.

New CEO Herman Kotzé said Net1’s earnings per share target hinges on the effectiveness of its Sassa contract for a full year on “existing terms and conditions”. This implies it expects the continuation of its contract well into its June 2018 financial year.

Cash Paymaster Services (CPS) is Net1’s subsidiary, distributing social grants to over ten million beneficiaries.

By April 2018, Net1 must relinquish paying social grants, after the Constitutional Court extended its contract for another year in March. The initial contract was declared invalid in 2015 by the apex court as it didn’t go through proper tender processes.

The Department of Social Development and Sassa has seven months to find a way to take over social grant payments, by either purchasing CPS’s infrastructure or issuing a new tender to the SA Post Office.

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

The group has three divisions. CPS falls into the SA transaction processing division, which pulled in $67.7 million (R882 million) revenue, growing 26% in US dollar terms or 11% in rand terms. The financial inclusion and applied technologies, and international transaction processing divisions 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 attributed the division’s revenue growth 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’s integrated into SA’s National Payment System.

EasyPay clients are also social grant beneficiaries, who are offered transactional bank accounts, add-on services e.g. micro-loans, life insurance, prepaid utilities via cellphones and Net1’s ATM network.

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

Kotzé said there’s opportunity to integrate Cell C into Net1’s businesses, such as providing recharge, prepaid and value-add products to Cell C customers.