CURN - Currency Exchange International: Rebounding While Remaining Undervalued

Summary

• Currency Exchange International, Corp. emerged stronger from its 2020-2021 slippages.
• It maintains a solid financial positioning against massive economic changes.
• Market opportunities are more promising despite the recession fears.
• The stock price keeps bouncing back, making it more attractive.

Despite operating in a highly volatile market, Currency Exchange International, Corp. (CURN) maintains a robust performance. It has already rebounded from its sharp plunge in the last two years. Revenues and margins are increasing as it expands its operations. CURN maintains an impressive Balance Sheet, given its large cash reserves. Indeed, it has more than enough resources to sustain its operations, cover borrowings, and endure market disruptions.

Moreover, it sees more upside potential despite the mixed market predictions. There may be risks, but opportunities continue to outweigh them. It can capitalize on the rise of e-commerce, revenge travel, and digital transformation. Likewise, the stock price keeps increasing in adherence to fundamentals but remains reasonable.

Company Performance

The past two years have been tough for Currency Exchange International, Corp. The pandemic caused operational disruptions across industries and economic downturns. The near-zero interest rates and limited transactions across regions hammered CURN's growth. It was most evident during the second half of its fiscal year. Despite this, CURN proved its capacity to withstand these macroeconomic disruptions. In the last year, it has shown a continued rebound as more businesses reopened. Today, the digital transformation fuels CURN's rebound. It emerges stronger as it remains well-positioned against the current macroeconomic headwinds.

The company set another record high as Q3 exceeded expectations. The operating revenue of 26.6 million CAD shows over 200% year-over-year growth. It is even higher than pre-pandemic peak levels by nearly 70%. Indeed, the company sustains its rebound and becomes more robust. Its payments business remains the primary driving force behind revenue growth. Thanks to the continued expansion of its global banknotes. It matches the increased domestic penetration to maintain the operational balance. It shows the successful and efficient execution of its recovery plan in 2020.

Its increased US market presence is also a primary growth driver. Its move in the previous quarter derived 78 new corporate clients. Note that 3Q was the peak of inflation in the US and Canada. But with the actions of policymakers and CURN's corporate efficiency, the operations remain solid. Canada is a financially secure nation, and both CAD and USD remain way stronger than most foreign currencies as their economy remains sound.

Revenge travel is another factor that continues to support Forex growth. The easing of restrictions and increased purchasing power helped bolster tourism in Canada and the US. The reopening of businesses and the rise in e-commerce also drove more capital inflows. I will discuss more of these factors in the section. What's important to know is that these factors contribute to stronger CAD and USD. They also allow more ForEx transactions. It is no surprise that CURN's ForEx and wire transfer activities continue to increase. Its 26,400 payments transactions in 3Q 2022 showed a 49% year-over-year increase.

Moreover, we must consider the robust price increases in energy commodities. The US and Canada are one of the top energy producers in the world. It is no surprise to see more capital inflows and increased demand for their currencies. Even better, Canada's economy is sector-driven, so CAD has a strong correlation with commodity prices. The substantial net increase in energy commodities and metal prices strengthens its currency. They receive more demand for these commodities as more economies rebound and ports reopen. Also, the geopolitical tension in Europe leads to more consumers shifting to them.

This quarter, I expect a stronger performance of the company. Inflation continues to lull in the US and Canada. Other G20 countries also show an improvement in their macroeconomic indicators. It matches with interest rate increments that may slow down once stability is achieved. Also, summer and autumn show an impressive increase in the number of travelers. Business applications and reopenings are also on the rise.

Even better, CURN keeps stabilizing costs and expenses as it expands. The increase in costs and expenses is proportionate to revenues. Yet, revenue growth completely offsets them. As such, the operating margin reaches 34%. I expect revenues and margins to reach $32 million and 39%. In the first half of 2023, they may still be increasing, but increments may slow down. When I estimated them, I considered seasonality since winter can limit tourism and business activities. Also, recessionary headwinds must not be downgraded. But I am optimistic, given the solid positioning of the company.

How Currency Exchange International, Corp. Can Sustain Its Rebound

Inflation can be a double-edged sword in the Forex market. It can affect the Balance of Payment since importing and exporting goods can be more expensive. It can cause devaluation in the current account of a country. Yet, inflation also leads to interest rate hikes, which can help in currency appreciation. It can drive higher currency demand and capital inflows, leading to a capital account surplus. Thankfully, the US and Canada navigate the volatile economy with prudence, and so does CURN. The company takes advantage of the current situation by capitalizing on accretive expansion.

Tourism may stay as one of the primary growth drivers of the company. Its Forex and wire transfer services may become more essential since more tourists may be needing more USD and CAD. Also, the unemployment rate remains low and stable, a far cry from the Global Financial Crisis. Hence, the purchasing power of many residents and tourists remains high. Inflation may strain their travel budget, but spending may remain the same. In a survey, 96.2% plan to travel at least once in 2023. Even better, 80.8% of the respondents plan to either spend the same or higher than they did this year. Estimates are also optimistic as many travel analysts believe that 2023 will mark travel recovery. It is expected to be the highest point of revenge travel. The US and Canada, particularly California, Pennsylvania, Alberta, and Quebec are included in the top travel destination searches.

Their business sector may become more robust next year. Their energy and metal commodities may receive more demand as prices stabilize. Also, e-commerce may flourish some more in line with digital transformation. The US with $843 billion and Canada with $44 billion is part of the top countries in e-commerce sales. International payments may become more of a staple as people veer away from cash transactions.

All these factors may drive the demand for USD and CAD. In turn, the Forex market will enjoy increased ForEx activities and wire transfers. Currency Exchange International, Corp. is ready for a potential demand upsurge. It continues to expand to increase its domestic and international presence. As such, it can cater to more customers in many locations.

But what makes Currency Exchange International, Corp. is its sustainability. It maintains a solid positioning to seize market opportunities and cushion recessionary headwinds. It has adequate cash levels to cover borrowings and CapEx. It does not have to raise financial leverage if it wants to keep expanding. Borrowings are already more than thrice as much as their value in the comparative period. But cash is more than enough to repay it and expand in other locations. The percentage of cash to total assets remains high at 76%. So the company is very liquid, making it capable of sustaining its operating size.

Stock Price Assessment

The stock price of Currency Exchange International, Corp. has been on an uptrend in the last two years. It has become sharper in the last month, but it hasn't rebounded to pre-pandemic levels yet. At $15.40, it has already increased by 44% from the starting price. But I still believe it is reasonable, given its price-earnings multiple of 11x. With my EPS estimation of $1.88, my target price is $20.68. My estimation using the EV Model ($23.67M - (-$78.64)) / 6,424,000 shares suggests a target price of $15.92. Both methods show the potential undervaluation of the stock price. The assess the stock price better, we will use the DCF Model.

-FCFF 2,800,000 CAD

-Cash 150,000,000 CAD

-Borrowings 44,000,000 CAD

-Perpetual Growth Rate 4.8%

-WACC 9.2%

-Common Shares Outstanding 6,424,000

-Stock Price $15.40

-Derived Value 25.78 CAD or $19.11

The derived value also shows an undervaluation of the current stock price. There may be a 24% upside in the next 12-18 months. Investors must see it as an entry point to make a position.

Bottomline

Currency Exchange International, Corp. maintains a robust performance. It emerges stronger with more promising upside potential. The company also has a solid financial positioning, allowing it to flourish amidst market opportunities and disruptions. Also, the stock price remains undervalued despite its continued increase. The recommendation is that Currency Exchange International, Corp. is a buy.

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