Currency Exchange International Corp. (CURN)

[protagonist12]

Operating in a niche industry providing small orders (less than $2.5K) for physical foreign currency in specific denominations, Currency Exchange is a focused operator beginning to achieve scale and associated operational leverage. The company is both well capitalized for future growth and increasing liquidity which should attract institutional investors in United States and Canada to the name. Furthermore, a near-term hard catalyst is on the horizon as CXI wraps up its process and approval in becoming a Canadian banker's bank. Once transitioning to a banker's banks, margins will expand by 15% (currently not reflected in market valuation).

Currency Exchange is trading at less than 20x net income pre-banker's bank catalyst and less than 7x fiscal 2015 EBITDA/~10x FY2014 run-rate EBITDA (note: we do not deduct cash from EV for CXI, in this case would represent ~$32MM in incremental value/ or 40% of the current market capitalization). Recently Travelex just sold for ~25x to 30x net income and 13x EBITDA. These levels of valuation also justify the $23 to $25 price target.

A position in Currency Exchange is merited by the following attributes:

Competitive Position Currency Exchange is the third largest participant in its niche and is the only non-bank participant, hence it has experienced significant tailwinds in capturing new business (generally regional and local banks). CXI has a differentiated and superior technology offering, partially due to their focus exclusively on currency solutions vis-à-vis peers such as Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC). 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.
Favorable Industry Dynamics with Strong Returns on Capital and Re-investment Opportunities

Foreign currency procurement is a low capital intensity, recurring revenue service business. Due to the asset-light nature of the business, CXI has consistently generated returns on capital in excess of 15%, even when including one-time costs. Inventory carries low risk (inventory currency hedged daily). Although a niche field, private equity and financial services conglomerates have been attracted to this field. Competitors infrequently compete significantly on price as a way to win new business.

The wholesale currency exchange logistics business carries significant barriers to entry for both large banks and new competitors. This is partially due to the "network" effect and infrastructure needed.
Attractive Valuation

Impressive margin profile, with EBITDA margins in excess of 25%. The company currently trades at ~10x 2014E EBITDA (EV not deducting $32MM in cash) & is worth at least 13x given organic growth and precedent transactions. CXI is a cash flowing business unlikely to need additional equity capital in the short and intermediate term. Precedent transactions have occurred anywhere from 12.5x to 36.5x EBITDA, with the low end slated towards retail providers. Given CXI's asset-light business model, low CapEx needs and embedded sales base, at minimum CXI would demand a 15x EBITDA multiple in the private markets, which would amount to a ~$20 share price excluding a true up, which would be in line with our upside case.
Steady & Consistent Cash Flow Model

Once the current business ramps up EBITDA above $10MM to $20MM, CXI will be able to take on conservative amount of leverage. While we do not model such a scenario in our valuation section, we believe a dividend recapitalization when appropriate could accelerate the realization of value. EBITDA to OCF conversion is one of the highest we've seen, with a ~95% or higher conversion rate. Hence, EBITDA rapidly falls down to the bottom line and is not caught up in maintenance capex.
Operating Leverage

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. Foreign currency funding costs will decrease 15% to 20% once the banking charter is approved (we believe late Q4 to Q1 2015) 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 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.
Experienced Management Team and Owner-Operator

Management is well-versed in the business and aligned with shareholders. Founder and CEO Randolph Pinna owns 25% of the business and is thusly highly incentivized to maximize shareholder return. Mr. Pinna started the predecessor business (Foreign Currency Exchange- 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.

http://seekingalpha.com/article/2493995-currency-exchange-international-compounding-cash-machine-at-a-deep-discount-to-private-market-peers