Currency Exchange International (TSX:CXI)

Elevator Pitch

  • Currency Exchange International (“CXI”) is a foreign exchange company, run by its Founder, who continues to hold >20% of the shares outstanding, and started the original business over 30 years ago.
  • As at October, 2020 the Company had a little over C$11 in net cash per share. While the majority of this cash cannot be deemed “excess” as it is essentially the businesses “inventory” it does provide firm downside support for shareholders looking at the company today, given the stock currently exchanges hands around C$11.
  • If international travel recovers, it should return to earning at least C$1.25 in EBIT per share
  • If it can take advantage of Travelex leaving the North American market + continue growing its payments business + get Exchange Bank of Canada (“EBC”) to scale, it could realistically get to C$2.30 in EBIT/share within 2-3 years

Therefore, I think CXI represents a highly asymmetric situation, with downside capped due to cash backing per share, and upside potentially 2-3X if EBC can scale and they can take advantage of the dislocations from the COVID-19 crisis.


Business overview

  1. Retail Bank Notes
    • Kiosks that allow consumers to convert one currency for another
    • 46 Company owned locations (down to 35 as at October 2020) across USA and focussing more on an Agent Partner model, where they supply the currency, software (AML, KYC, other compliance) and logistics to partners in return for 60% of the commission from any exchange (typically a 10% spread)
    • Very high margin business, but is the smaller part and serves another purpose of supplying inventory (the physical currency) that they use in the wholesale division (because the branch network is a net-buyer of currency)
  2. Wholesale Bank Notes
    • Centralised – supplying banks with physical foreign currency to fulfil customer requests
      • Typically, a 1% commission
    • Decentralised – fully outsourced FX service provider for regional banks
      • Provide the bank with their software (AML, KYC, inventory management, fully integrate with the banks existing software/protocols etc), handle pick up and drop off of currency, leave foreign currency on consignment at the bank, produce a fully white labelled receipt for the end customer
      • Typically a 3% commission
  3. International Payments
    • Cheque clearing, wire transfers, forward contracts, etc.
    • These customers are typically the same as decentralised wholesale bank notes (smaller banks that use them as their outsourced FX provider)
    • Uses the same software and is compliant with all US and Canadian laws
    • Not just for holidaymakers, but for businesses too
    • Commission up to 100bps

Their software is integrated into their customers other operating systems, creating a very sticky product. It is also a no-brainer for the banks because it completely de-risks the transaction for them (which is important because it is not an overly common transaction).

They also have a Schedule 1 Banking Licence in Canada via “Exchange Bank of Canada” which I beleive allows them to source physical currency directly from the printer and opens up access to certain banks who require their partners to be banks too. There are very few Schedule 1 Banks in Canada and this in itself is extremely valuable.

They are in the process of sourcing physical USD’s directly from the Fed, which would make them only the second Company able to source physical currency directly and sell internationally (from my understanding). This has the potential to be a huge volume (albeit low margin) business, wherein they source physical USD’s, ship them across to Europe/UK for delivery to banks.


Market

The wholesale bank note market in the US is dominated by Bank of America and Wells Fargo. CXI is effectively taking market share because non-affiliated banks would much rather deal with an independent 3rd party FX provider than a competitor.

In Canada, the market is dominated by Bank of America and CXI is winning share because banks want to de-risk their exposure to one counterparty and have 2 suppliers.

They are picking up the share left from HSBC, Bank of Ireland and Travelex leaving the North American market.


Corporate timeline

1987:Randolph Pinna buys Foreign Currency Exchange Corp (“FCE”) from his Dad for nominal sum
1997:IPO’s FCE on the TSX and grows it to become the 2nd largest non-bank currency provider
2003:Business is sold to Bank of Ireland for EUR 10 Million (22X EBITDA multiple)
2007:Randolph Pinna buys the retail (kiosk) business back from Bank of Ireland for $2 Million
2010:3 year non-compete finishes and Randolph begins to rebuild the wholesale business
2012:CXI IPO’s on the TSX and applies for a Schedule 1 bank licence
2016:Bank licence approved, allowing them to source currency direct from the Fed and to service larger customers who require the FX provider to be a bank as well
2017-19:Company continues to invest heavily in building Exchange Bank of Canada
2020:COVID-19 causes global travel to come to a halt, materially impacting performance

SWOT Analysis


Valuation

Therefore, at C$11 buy price, we have an expected 70%+ ROI and IRR of 20%+


Financials

The key metrics for the business, Exchange Volume & Revenue, have continued growing at very high rates for a number of years. I believe that as Exchange Bank of Canada can start to turn a profit and scale, margins are likely to return to the mid 20’s and potentially exceed 30% within 3-5 years.

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