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Why Net 1 UEPS Technologies Stock Dropped 34%

By Rich Smith - Updated Apr 25, 2019 at 8:10PM

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Blame the lawyers. Or at least the judges.

What happened

Shares of South African payment technologies specialist Net 1 UEPS Technologies (UEPS -0.59%) plummeted in Nasdaq trading after the report of a big legal reverse in the company's home country. In a statement this morning, Net 1 reported that the High Court of the Republic of South Africa (Gauteng Division, Pretoria) has issued a final judgment in the company's lawsuit asking that the South African Social Security Agency (SASSA) be instructed "to pay social grants into the EPE accounts of recipients who had previously made biometric elections to receive their grants into their EPE accounts, but had not submitted a SASSA-prescribed form called an 'Annexure C form.'"

Net 1's share price is down 33.5% as of 1:50 p.m. EST. 

Glowing red stock stock arrow trending down

It's "condition red" for Net 1 UEPS stock today. Image source: Getty Images.

So what

That fact should tell you right away that the High Court's decision was not the one Net 1 was hoping for.

What happened is this: Instead of instructing SASSA to load pension benefits directly into the accounts of Net 1 customers who had asked for this -- but failed to file the correct forms to make their requests official -- the High Court decided that only customers who have filed the correct forms will have their pension funds routed through Net 1.

Net 1 is considering appealing this verdict. In the meantime, however, the High Court's decision has put it in something of a bind, as Net 1 had invested heavily to prepare for the influx of new business that would have accompanied a positive verdict. Failing that, Net 1 now expects "to report a significant loss for the second quarter of fiscal 2019," the more so because SASSA never got around to implementing the High Court's earlier, interim order that should have required it to rout at least December, January, and February pension payments through the company.

And now there's no reason for it to do so.

Now what

Net 1 says it will now set about "right-sizing" its South African operations based on the unfavorable litigation outcome. The company hopes to get at least back to a "break-even level by Q4 2019" -- but that's still two quarters away.

The implication would appear to be that Net 1, which most analysts still expect to be profitable this year, could instead suffer losses until it gets back to "breakeven." In that case, investors' decision to sell the stock today would be entirely understandable.

Check out the latest Net 1 UEPS Technologies earnings call transcript.

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