Thesis: A sleepy fintech trading at almost its net cash value with 300-500% near term upside led by a senior management team with substantial skin in the game, that led significant cost cuts while increasing market share, and led by a high double digit growth Payment segment.
First: CURN is the US OTC stock of CXI, on the Toronto stock exchange. Its a US, Orlando based company, that owns a Canadian bank, with half of the company's assets in the US and in US dollars. There is a pretty good write up on CXI from 8/23 which I recommend perusing as its still fresh and out of respect for this website I don't want to repeat what ChapterTwelveCapital wrote just to get a write up in. My goal here is to do a little refresh and offer my perspective, with hopefully some value added comments.
Background/Balance Sheet: CURN is primarily known as a ForEx exchange kiosk company. They don't actually do airports (which was, prior to bankruptcy reorg TravelX), but they have a number of key border and tourist destination locations which for obvious reasons, 2020 was not a good year for travel/currency exchange. 2021 might not be either. However, over the years, through its Exchange Bank of Canada subsidiary which took longer and more expensive than most people anticipated, its become a very good Fintech in the 2B2 space in helping Canadian banks manage their foreign currency exchange and more importantly, compliance. This has been an inhouse developed software many years in the making:
*from the MD&A: CXI is a publicly traded company (TSX:CXI;OTCBB:CURN), and is a reporting issuer in the provinces of British Columbia, Alberta, and Ontario. It specializes in providing currency exchange and related products to financial institutions, money service businesses, travel companies, and other commercial clients through its proprietary payments’ platform, company owned branches and vaults, and inventory on consignment locations, throughout the United States and Canada, by utilizing the Company’s sophisticated software application, CEIFX. The Company has developed CEIFX, its proprietary customizable web-based software, as an integral part of its business and believes that it represents an important competitive advantage.CEIFX is also an on-line compliance and risk management tool. The trade secrets associated with CEIFX are protected via copyright, restricted access to both the software and its source code, and secure maintenance of source code by the head office. CEIFX is updated regularly and ongoing system development and enhancement is a core activity of the Company. CXI had 261 employees at January 31, 2021, of which 67 were part-time.
So the last twelve months have obviously not been good for the company, burning through about $6mm in cash and stabilizing at $500k a month burn rate and supposedly improving. The company's pre Covid revenue run rate was $42mm (at 98.5% GMs, the gross profit was $41mm) and about $6mm in FCF. So not the best reversal but one that also shows the operating leverage inherent in the business. So what are some key points on what happened:
- To me the most important point is that the company cut about $10mm in run rate costs off its cost structure. This was mostly done in the banknote business which has been hit hard, still down 62% in the last quarter. The company cut kiosks from 46 to 34 in 2020, currently not anticipating opening new locations, but TravelX has left Americas which has led to an increase wholesale demand for banknote business. The 12 stores did not represent the proportionate revenue/profitability so it wasn't a big loss. As a result they have become the biggest nonbank distributor of banknotes in the US and likely in Canada as well.
- The payments business is going great, up 82% this past quarter to 33% of revenues, vs just 10% a year ago. The long-term goal is for this business to be half of the book. More importantly it is now integrated into Fiserv and Jack Henry, as software providers to banks which represents 40-50% of all core operating systems for banks and financial institutions in the US. This is important because basically it skips one of the two steps that a bank would need to activate the payments software is now literally just turnkey. That means that the company is already operationally plugged into half of its market. A note on this software is what makes it so good is that it a) really allows the banks to not worry about its biggest fear: compliance and b) is very white board, meaning it can be easily plugged into a banks operating system, which is why I suspect Fiserv and Jack Henry put it on their platforms.
So those are the important updates and I think its good to go through the thesis here:
Downside: a net $54mm in cash and $57mm in liquid book equity at 6.4mm shares or about $8.50 per share in real asset value, excluding the software which is obviously worth something as well ($1.00 -$5.00), and I am willing to concede a potential $6mm burn for another year given how badly Canada is doing with Covid. So I would say $10.00 is a good scenario to think about in terms of permanent capitol loss from $11.50 today. Not bad.
Base/Best Case: 2021 sucks, not until late in the year will things get back to some tourism travel with US/Canada and Europe/US. I would imagine it would be another 12-18 months of malaise but thinking through of 2023 which is where we should be in 18 months the company can likely get back to $30-$35mm in banknote revenues. The Payments business should also be about $20-30mm by then. So you're getting a double whammy of return of Banknote Business, plus the high growth for Payments business kicking into high gear at $50-$55mm in revenues potentially by 2023. At $42mm in revenues the company made $6mm in FCF. Obviously some costs have shifted around but Randolph has recently stated that significant operating leverage starts at $30mm in revenues and given the company's cost restructuring I do not think its wildly optimistic to assume $15mm to $25mm in Free Cash Flow. Thats $2.50 to $4.00 in Free Cash Flow per share on a company whose enterprise value right now is $3.00 per share. I would say $2.50 being base case and $4.00 being best case.
Assigning a 5% FCF yield on 2023 estimates gets you to $50.00 to $80.00 per share excluding the $8.50 in cash value. There are arguments for and against in using the cash in PT. I think its ok to use it in a downside scenario as a margin of safety, but inappropriate to use in going concern valuations given its NWC.
I think the wild cards here is obviously the timing of return of tourism and growth in Payments (which I think is just getting started) but for me with potential like this whether it happens in 2022, 2023 or 2024 is almost irrelevant. The company has now a leading position in the bank notes business and its now more on macro/govt controls opening up than anything they can do. However the payments opportunity is rather large and it seems after years of investments its finally paying off. A 350%+ upside with 15-20% downside is a pretty good proposition.
Risks: I am just flat out wrong. Payments doesnt grow beying this year, never takes off. Bank notes never comes back to even 75% of pre-covid. At this level company just treads water at its margin of safety price. Has some key man risk: very old team with Randolph, at 10-20 years, but he is still the captain that runs the ship.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise do not hold a material investment in the issuer's securities.
Return to profitability; showing true operating leverage; continued success with tuck in acqusition; reopening of US Canadian border for tourism