Update - Overview of Investment of Currency Exchange International (CXI/CURN)

Review

In late December of 2020, I provided a write-up (here) of Currency Exchange International, a foreign currency exchange and payments provider to both retail and wholesale customers in the US, Canada, and throughout the world.   At that time, CURN was losing (hemorrhaging might be a better description) money and in the midst of a restructuring effort to ride out the pandemic and position the company for longer-term growth.  My initial investment in CURN was based on their business plan prior to the pandemic.  As events of the pandemic unfolded and the company responded to these events, I gained confidence that the company would remain solvent and that they potentially might have good or even substantial upside once the impacts of the pandemic began to subside. 

In the initial analysis, I also reviewed the potential forward paths as I saw they might develop.  While the actual path of the events differed somewhat from those presented, the basic elements remained unchanged from my previous analysis.  Overall, the company has made outstanding progress toward revenue and profitability recovery.  As the rebound has unfolded, the revenue gains were broader than expected and much of the opportunity remains uncaptured.  There is no question that the early bounce-back in the business has exceeded what would be expected by economic conditions.  This suggests that the initial assumption about the business and future prospects was accurate if not underestimated. 

 

Current Situation

In their recent Q122 filings, CURN reported their highest ever quarterly revenue at $12.46MUSD.  The most surprising aspect of CURN’s results was that this record revenue came at a time when international travel was (and is) clearly in the very early stages of recovery.  Further, the uptick in revenue comes during a time of year that has traditionally been the lowest seasonal performance for the company.   Most of the growth occurred in the banknotes segment and seems to confirm management’s strategy to restructure that business while opportunistically taking advantage of the competition’s exit from select markets. 

My investment in CURN was initially based on their overall safety, actions to scale their business, improve margins and build out their banking business.  These factors remained as good drivers despite the decline in their business due to the pandemic.  However, the opportunity presented by a beaten-down price and eventual recovery from the pandemic seemed to have a potentially compounding impact.  This prompted me to continue buying CURN in (over 50) bite-sized pieces over the past 14 months.  Prior to reporting of their Q122 results, my position had grown to over 25% of my portfolio! 

I’m continuing to understand how the actions that the company has taken and continues to take in its banking business will impact the revenue and profitability of the banknote business.  It is not clear to me how has the company managed to achieve the results seen in the most recent quarter.  The company has really not offered enough quantifying explanations to sort this out, but from their conference calls and information provided in their filings, it is clear that much of the improvement lies outside of the retail operations.  While my understanding falls short of any predictive ability in future outcomes, what is certain is that the impacts of these actions have been positive and that it is not unreasonable to assume that further rebounds in travel will produce future gains, potentially substantial ones.  At this point, there is simply no way to quantify the size of these gains without a better understanding of CURN’s potential market size and capture of market share. 

Less encouraging was that the recent quarter showed performance in the payment segment of Currency Exchange International’s business was (potentially) subdued from some of their previous progress.  While the number of customers grew in the quarter, the revenue growth coming from this segment in the past two quarters seems to have slowed considerably.  It is too early to understand if growth has stalled or if it simply is a function of other factors.  The company continues to be optimistic toward this segment.  They continue to discuss their search for acquisition targets that are aimed specifically at the payments business.  Given Pinna’s conservative management style, such an acquisition would likely be positive for the future of the company.

 

Outlook

While the company does not provide any sort of guidance, information gleaned from other investors who claim conversations with Pinna have pinned the company’s potential revenue in 2-3 years in the 70M range.   As those conversations took place approximately one year ago, I believe it is reasonable to use this as an FY24 number.  Based on past performance and other recent growth factors, I see the 70M as conservative and near the low end of the potential range (absent another pandemic-type event).   In my simple model for the company, I have estimated a range of $70-95MUSD for FY24.  Given their revised structure, operating margins are difficult to predict.  But, framing them using historical numbers to bookend the margins and multiple, a price between $15 and $60 is likely for that level of revenue.  While a very large range, there is still safety in that range for my cost basis near $10. 

I continue to see a positive business opportunity for the company.  Should the pandemic’s impact on travel continue to abate, it is likely CURN will continue to grow at a pace that exceeds general market performance.  With the four pillars of their strategy taking hold, the chances that one or more of those pillars might provide for substantial growth remains a good reason to remain fully invested in the company.  However, as the recent results have pushed the price up over 40% from my average cost, the percentage of my portfolio invested in the company is far too high for me to consider any additional investment.

Absent a sale or acquisition by a larger firm, CURN will remain a small company, and price volatility will be part of its path forward.  However, today’s price near $14.00 still provides substantial value and safety for new money.  I estimate that the banknote business is likely worth around $20 on its own.  Future analysis (in 1-2 years) will focus on valuing the company by attempting to assign values to the individual pieces of the company.  I expect these pieces to be retail banknotes, wholesale banknotes, and payments.