Avalon_Studio
The following segment was excerpted from this fund letter.
Currency Exchange International (TSX:CXI:CA, OTCPK:CURN)
Currency Exchange International is one of only three major suppliers of foreign banknotes to the United States and of US dollar banknotes internationally. Banknotes are typically used for travel and the Covid induced downturn masked major market share gains made by the company after its key competitor Travelex exited the US.
CXI is run by Founder Randolph Pinna, who owns 21% of the company and has high integrity, delights customers, and a 35-year track record of building two banknotes businesses that have delivered strong shareholder returns. The company trades on 11x EV/FCF today and we expect earnings to compound at 15+% p.a. over the next three years. That puts the stock on just 5-6x our estimate of FCF in three years’ time, net of cash generated in the interim. We started buying shares at US$14 in mid-2022, it trades at US$18.5 today, and we believe intrinsic value will be around US$50 in three years.
We attended the company’s AGM in Toronto, Canada, and visited its headquarters in Orlando, Florida, this quarter. These gave us an opportunity to speak with many of CXI’s management and board members. We continue to see progress on two key opportunities for the company.
We think CXI’s first large opportunity is to use its cash.
The company holds $106mm in cash and $4mm in debt, a huge amount of net cash compared to its $120mm market cap. We estimate that $80mm of this cash needs to be held as physical banknotes so should be thought of as inventories while $20mm is needed as working capital, meaning excess cash that could be deployed is closer to $20mm.
One of the reasons the stock is cheap is that investors are concerned management are not allocating capital well. However, CXI began buying back shares this quarter and have an authorization to buy back 5% of the share count which we believe will be fully utilized this year. That means around half of this year’s FCF will be deployed into buybacks. Over the next three years that should reduce the share count by 15%.
We continue to believe that a potentially excellent use of cash would be for the company to acquire one of its banknote competitors. This would result in large synergies as costs such as vaults, tech, and staff often do not need to be duplicated. Since there are only a few other players in the industry, any acquisition would be large and significantly increase FCF.
And at the company’s AGM, the CEO publicly stated that additions to senior management have freed up his time to focus on transformational acquisitions.
Given the strength of the company’s balance sheet, we estimate much of this acquisition could be financed through credit facilities. An acquisition would also demonstrate that the company’s cash is not ‘trapped’ and so likely lead to a significantly higher valuation multiple as investors start pricing in future cash deployment. We are also confident management will not overpay given their conservative nature.
We think CXI’s second opportunity is to grow outside the United States.
The company is one of only three licensed to supply dollar banknotes from the Federal Reserve to banks across the world. We think this market is worth around $380mm in revenues, versus CXI’s total revenues over the last twelve months of $83mm.
CXI had yet to make any serious progress because the US banking crisis last year made customers reluctant to source banknotes from a small company. That has changed in the last month, with CXI finally opening trust accounts at one of the world’s largest providers. The trust will effectively act as a middleman and guarantee large transactions between CXI and its customers for a small fee. Given this solution was found in collaboration with customers, we are hopeful that the company will now be able to capitalize on this opportunity.
We expect that investors will greatly reappraise CXI’s intrinsic value over time as the business grows outside the US and management deploys cash. We also believe that the potential downside over a 3-5 year horizon is low if we are wrong given the company’s fortress balance sheet, 11x EV/FCF valuation, and double-digit growth rate.
