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NAMSYS INC CTZ.
August 24, 2020 - 11:55am EST by
andrew152
2020 2021
Price: 1.10 EPS 0.05 0
Shares Out. (in M): 27 P/E 21 0
Market Cap (in $M): 30 P/FCF 0 0
Net Debt (in $M): -4 EBIT 0 0
TEV (in $M): 26 TEV/EBIT 0 0

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Description

 
Operations

Namsys sells their Currency Controller system to financial institutions under a license model (15% of revenues) and their other products under a subscription SaaS software model (83% of revenues). Their products are distributed through third parties (e.g. Brinks, which represents ~40% of revenues, up from ~28% in 2015). Sales of their SaaS products are billed monthly – third parties purchase the system from Namsys and mark it up to end users. This allows Namsys to maintain high margins (gross margins are ~70% and operating margins are ~45%).

Currently, over 90% of revenues are from the US, however the company has plans to expand internationally (more on this later), with active projects in 20 countries.

 
Cash – Down, but not Out
There’s no doubt that cash is in a secular decline as a % of transactions, with the rise of alternative payment solutions that market to the unbanked/underbanked (Venmo, Cash App, etc.) However, there’s a strong likelihood that it’s still here to stay for a while. In Brinks’ latest quarterly report presentation, they released a few graphs on cash usage. The graphs showed an increase in cash in circulation, as well as an increase in cash processed since COVID.
  
 
The phenomenon of cash usage increasing in a recession is nothing new. A similar phenomenon occurred in late 2008 in many countries including the US and the UK. There’s no clear explanation why, but it may be due to the fact that people like the certainty of having cash on hand.
 
Cash also offers other advantages, such as protection against shrinkage due to negative rates. When the deposit rate of the ECB went below zero, sales of Germany’s largest safe manufacturer (Burg-Wächter) increased by 33%. In a ZIRP/NIRP environment, we believe that the usage/hoarding of cash would
remain strong.
 
However, there are strong indicators that indicate that cash is in a secular decline. The primary users of cash in the US are low-income households that are unbanked/underbanked. In recent years, there’s been a creation of apps that are attempting to reach those same customers. The most popular of those
apps are Cash App (Square), Venmo (PayPal). The COVID crisis and the direct stimulus payments acted as a catalyst for these apps. Venmo, in particular, reported a record $37B in transaction volumes while active users grew by 8 million to over 60 million.
 
The ideal situation for Namsys is a slow decline in cash usage that forces companies to use their system to reduce costs. That situation seems to be in play today – there should be demand for Namsys’ systems for time to come.
 
Competition
 
Namsys does not compete with any company that offers an all-in-one cash management cycle solution. As a result, management has asserted that they have the ability to increase prices within the competitive Smart Safe segment (>60% of revenues) due to their high customer retention rate.
Unfortunately, they didn’t release any specific numbers, however the market share of 11% and compound annual growth rate of 20% for the Smart Safe segment should speak for themselves.
 
Expansion
Currently, >90% of revenues are generated within the United States. There are growth opportunities globally in developing countries due to their large underbanked populations and higher dependency on cash. The COO has indicated that they are open to global expansion opportunities, however there are still “low-hanging fruit” growth opportunities in the US. Most of their current customers only use one Cirreon product, when management believes there to be the opportunity for them to two or three products. The upsell opportunities have been critical to historical sales growth.
 
For geographic expansion opportunities, Namsys has developed relationships with multinational players (such as Brinks, which represents ~40% of revenues). This allows Namsys to expand globally with a low customer acquisition costs. With Brinks, they’ve expanded into Mexico and other Central/Latin American
countries. Mexico in particular has been a growth opportunity for them – they’ve grown from barely any revenues to $120K in revenues in a single year (2% of total revenues).
 
Balance Sheet/Valuation
Namsys operates with no debt and roughly ~$5.4M in cash and cash equivalents. They have more than enough cash to cover their short-term liabilities, and the few long-term liabilities they have (an operating lease and an employee bonus plan) which total $1.6M.
 
Their EV is approximately ~$26.2M, which represents a 20.8x multiple on trailing earnings. Growth has historically been in the high 20s percent, however due to COVID, revenue growth slowed to 15% in the most recent quarter.
 
It’s difficult to find comparable companies with a similar size and quality (measured by margins) as Namsys. However, Fiserv currently trades at 77x earnings, growing revenues at 40% a year. Descartes, with trades on the TSX, trades at 117x earnings and grows revenues at 18%. While a discount is justified, as Namsys has a small market cap (~$30M), 21x earnings is very cheap for the growth that comes with it.
 
Potential Acquisition Candidate
Both Fiserv and Descartes have a history of acquisitions. If Namsys continues to grow, it’s possible that it would be acquired by either company.
 
Risks
- FX (USD related)
- Customer Concentration (~40% of revenues are from Brinks)
 

 

I hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

- Continued Growth
- Possible Acquisition
- Multiple re-rating
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