By Tim Boreham
 
The only pure-play, ASX-listed ATM operator, Stargroup sniffs an opportunity in the big banks’ decision to abolish foreign ATM fees at an estimated collective cost to their revenue of $120 million a year.

At face value, this magnanimous act should be a threat to the independent operators: why would punters still fork out an average $2.40 per withdrawal on a Stargroup ATM when they can do it for nix on a Big Four ATM down the road?

Sensing danger, investors whacked Stargroup shares by 25% after the Commonwealth Bank sparked the Big Four fee abolition chain reaction.

But Stargroup, the second biggest independent ATM deployer behind the global giant Cardtronics, believes the fee abolition will spur the banks to outsource their ATMs. “Stargroup has been positioning itself to be at the table to have such discussions with the majors,” Stargroup CEO Todd Zani says.

Zani reckons the CBA alone spends at least $160 million a year on its ATM fleet. On Deutsche Bank’s sums, the Big Four will forego $117 million a year in foreign fee revenue, ranging from $38 million for the Commonwealth Bank to $22 million for the National Australia Bank. “There are possibly lesser incentives for the owners of ATMs to continue to invest in and maintain their network,” Deutsche says.

Zani claims Stargroup could run the ATMs much cheaper, because most of the banks’ ATM hardware is outdated.

He says Stargroup’s fleet of 2400 ATMs (owned and operated for third parties) is similar to the ATM networks of the smaller two of the Four Pillars, the ANZ Bank and the National Australia Bank.

“So we have proven we can operate an ATM network the equivalent size of two of the four majors.”

As for Stargroup’s nasty share price tumble, Zani attributes the selling to retail investors who don’t understand Stargroup’s business model.

In reality, he says, there’s little risk of the fee-free bank ATMs leaching business from its own machines. Stargroup ATMs are located in venues such as pubs, clubs, servos and 7-11s and pitched at convenience. Typically, a pubgoer will pay a high fee rather than trawl a hostile street late at night for a bank ATM.

In the meantime, Stargroup defies the gradual but remorseless trend away from cash.  According to the Reserve Bank of Australia, consumers withdrew $11.3 billion in the month of July over 51.8 million transactions.

Two years earlier, they withdrew $12.48 billion across 60.5 million transactions. While this downward trend has been consistent, the number of banknotes in circulation has been growing by a steady 6% a year.

Stargroup reports total owned ATMs of 509 as at June 30 2017, up 46%, with average monthly per-machine transactions of 595 (up 4%).

Thanks to a $6.6 million tax benefit, Stargroup reported a full year profit of $1.9 million on revenue of $8.3 million. Management guides to current-year earnings of $2-2.5 million on revenue of $20-21 million.

Despite the ATM resilience, Stargroup isn’t ignoring the day when the last crisp fiver is withdrawn from circulation. In early September the company signed a joint venture with the listed block chain company DigitalX (DCC) to provide ‘two way’ Bitcoin ATMs.

Currently there are fewer than 20 Bitcoin ATMs nationally and most of them only allow one-way purchases (adding the currency to a digital wallet, not selling it for ‘real’ money).

Bitcoin ATM conversion fees are a chunky 4-8% of the transaction. At the midpoint, that’s around $300 per transaction at the current per-Bitcoin rate of around $4950.

But while pocketing $300 is more compelling than reaping $2.40 on a normal ATM transaction, few Bitcoin transactions take place. For the time being.
 
Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.