CXI.TSE - Currency Exchange International Corp.

[zuokk]

Hey everyone, new member here looking to contribute a little something.

 

Kyle Mowery from Grizzly Rock recently posted his 2013 annual in which he made a bullish case for CXI:

http://grizzlyrockcapital.com/wp-content/uploads/2013/11/GrizzlyRock_2013_Annual_Investor_Letter.pdf

 

"We estimate Currency Exchange is currently priced at one half its current private market value

if the business were to be acquired. Further, GrizzlyRock expects business value to grow

15%+ per year as Currency Exchange begins servicing larger and larger financial institutions

and increases margins.

 

...As return potential is inconsequential without considering potential

investment downside, what then is Currency Exchange’s value in a stress scenario? Assuming

no growth and a stressed EBITDA multiple GrizzlyRock values the business at ~$55 million

which implies a ~20% decline in share price. GrizzlyRock considers the stress case to be

highly unlikely and expects substantial price appreciation over the next few years."

 

Here's a brief rundown: 

 

Currency Exchange is mostly a b2b wholesale provider of foreign currencies.  The CEO took a similar business public a while back and sold to Bank of Ireland.  During the Crisis, the Bank exited the business and the guy bought the retail side and eventually built up a wholesale distribution network and a proprietary web interface.

 

For retail clients, they have forex booths at major tourist destinations in the US.  For wholesale clients in both the US and Canada, they would bring over any one of the 80 currencies they have in inventory whenever it is needed by their client (mid-sized banks, credit unions, corporations).  Even though most of their business is concentrated in banknotes, they're also involved in other financial services such as wire transfers and traveler cheques.

 

An upcoming catalyst brought up by Kyle in his letter is the pending application for Currency Exchange to become a Charter I bank in Canada, thus allowing them to do business with the Bank of Canada (get cheaper currency).

 

My concern is how sustainable the moat of this business is due to its reliance on banknote transactions which could be a dying business.  Anecdotally, I mostly use my VISA when I do cross-border shopping and everyone knows the booths are a ripoff.  In regards to its wholesale business, how likely will one of the major banks decide to squash their expansion or make it hard for CXI to get its Canadian banking license?  And if none of the Big 5 in Canada complains, how lucrative can this business be?

 

Looking forward to hearing what everyone thinks.  Thanks.

 

[mcliu]

Pretty interesting business. Does anyone have experience in this area and can point to the competitive landscape?

[hardcorevalue]

I've almost never used currency exchanges. I just use my atm card and withdrawl cash in the local currency. Removes the human element to potentially scam you.

[GrizzlyRock]

Hey guys - this idea is worth spending a few hours on.  See below for our Executive Summary  (don't want to post the entire report publicly)

 

Executive Summary

 

Operating in a niche industry providing small orders (less than $2,500) for physical foreign currency in specific denominations, Currency Exchange International, Corp. ("CXI" or "Company") is a focused operator beginning to achieve scale and associated operational leverage. As CXI’s market cap was ~$30 million earlier this summer (before the warrant issue in September), many investors have not been paying attention to the CXI story. 

 

Including the warrants exercised in September 2013 which raised $10.4 million, the company is both well capitalized for future growth and increasing liquidity which should allow both US and Canadian institutional investors to access the market. Currency Exchange common stock is currently vastly mispriced in the market. The following outlines the rational thereof:

 

Excellent Competitive Position

• Currency Exchange is the #3 player in a profitable niche and is winning business from legacy bank customers.

• Competitive advantage in technology & service.

• Focused non-competitive partner of local banks. Regional banks do not want their private data going to rivals such as Bank of America or Wells Fargo who may attempt to compete with profitable branch locations as much as possible.

 

Niche, Non-Price Competitive Industry:

• Foreign currency procurement is a low capital intensity, recurring revenue service business.

• High returns on capital (~20% as a historical average) with low risk (inventory currency hedged daily).

• There is a reason private-equity has been involved in the industry (Precedent transactions are at very high multiples).

• Competitors infrequently compete significantly on price as a way to win new business.

• High barriers to entry for both new entrants and even large banks.  Massive network effect of technology and logistics such that CXI and other current competitors can perform the services much more efficiently than new entrants or even a large bank such as Chase.  (Please see the wholesale section on page 4 for more information).

 

Attractive Valuation

• Impressive margin profile, with EBITDA margins in excess of 25%.

• The Company currently trades at 9x 2014E EBITDA & should be trading for at least 15.0x and arguably higher given CXI’s growth trajectory and precedent transactions.

• CXI is a cash flowing business unlikely to need additional equity capital in the short and intermediate term.

 

Extremely Steady Cash Flow Model

• The business will be able to utilize financial leverage when EBITDA reaches $10 to $20 million.  While not included in our valuation cases – a dividend recap three or more years out is highly achievable and CEO Mr. Pinna is unlikely to hesitate to leverage his incredibly sticky business.

 

Operational Leverage Tipping Point:

• With 4 vaults including a 5x increase in vault operations staff, a scalable platform, and a growing cadre of banks working through the sales pipeline, CXI is poised to begin earning new client revenue which will increasingly fall to the bottom line.

    o Note: this will keep getting better and better as CXI gains share and begins servicing ever larger institutions

• Foreign currency funding costs will decrease 15% to 20% once the banking charter is approved (targeting Q1 2014) as CXI will have the ability to go to the US Federal Reserve banks and the Bank of Canada for currency instead of a large bank acting as in a wholesale capacity.

• Becoming a banker’s bank will allow CXI to sign large banking clients in both the US and Canada which have been hesitant (compliance etc.) given CXI’s money service business regulatory status.

 

Owner Operator Model:

• Management is well-versed in the business and aligned with shareholders.

• CEO Randolph Pinna owns just under 25% of the business and is thusly highly incentivized to maximize shareholder return.

• Mr. Pinna started the predecessor business (Foreign Currency Exchange aka “FCE/Wells” – now owned by Wells Fargo) in 1987, sold FCE to the Bank of Ireland in 2003, and led the carve-out of what would become CXI in 2007.

CXI_Q2_2014_Conf_Call_48820433.mp3

[GrizzlyRock]

Anyone do work here? remains highly intriguing