CA - Greystone Capital - Currency Exchange Intl: Boring Yet Incredibly Profitable
Summary
- Currency Exchange ploughed through 2022 on their way to record operating performance.
- I believe CURN can eventually gain a double-digit percentage share of this market.
- The attractiveness of CURN’s business model stems from the incredibly high operating leverage.
- Demand for US dollars continues to strengthen, providing a decent growth runway for CURN in the years ahead.
- I believe there is still room for significant upside from here.
The following segment was excerpted from this fund letter.
Currency Exchange International ( OTCPK:CURN )
Currency Exchange International, this boring, yet incredibly profitable business ploughed through 2022 on their way to record operating performance following years of internal initiatives and investments that are now beginning to pay off. CURN was one of our best performing holdings for the year and represented a situation where share price activity actually followed strong business execution.
During the year, Currency Exchange generated a record $66mm in revenues, up 117% from 2021, on the back of strong travel demand and demand for US dollars, exceeding their pre-COVID run rate by 60%. Increases in international travel, market share gains and increased penetration in global banknotes through participation in The Federal Reserve Foreign Bank International Cash Services Program (FBICS) drove the strong results. As one of only three businesses approved for international currency distribution inside of FBICS through their Exchange Bank of Canada, CURN uses this advantage to source cost effective dollars from the Fed as well as win new and larger bank customers within their banknotes segment. I believe CURN can eventually gain a double-digit percentage share of this market on their way to continued growth driving high incremental profitability. Importantly, on the back of significant top line growth, Exchange Bank of Canada generated its first full year of profitability, opening the door for favorable borrowing opportunities from here. Turning to the Payments segment, whose merits deserve more than one sentence, top line growth remains strong, with revenues increasing 61% during the year while reflecting strong operating leverage and driving both diversification and resilience in the business away from banknotes.
The attractiveness of CURN’s business model stems from the incredibly high operating leverage whereby incremental increases in banknotes and payments revenue fall significantly to the bottom line, driving massive EBIT expansion as the company grows. As with many of our businesses, CURN focuses on a specific and smaller customer niche, out of the reach of competitors such as Bank of America and Wells Fargo. In addition, the void left by Travelex exiting the banknotes business has created significant whitespace for CURN to not only gain export customers but enter into airport retail locations that Travelex left behind. Fee based agency agreements without the use of leases make the unit economics in large airports very attractive. Furthermore, despite misconceptions regarding the banknotes industry, demand for US dollars continues to strengthen, providing a decent growth runway for CURN in the years ahead.
Layered on top of my optimism for the business are the levers that management can pull on the capital allocation front to drive further value. CURN’s market cap is around $120mm USD with $88.5mm in cash on the balance sheet. The majority of this cash serves as inventory located in CURN’s vaults and is used for transacting, but I’d estimate there is $30-40mm of excess cash not needed for inventory purposes able to be returned to shareholders or put to use via M&A. Invested alongside us as the largest shareholder, founder and CEO Randolph Pinna should be interested in taking steps to unlock this value by introducing some leverage into the organization to free up some of the cash used for inventory, while thinking about share repurchases or dividends. In October, CURN took the step of hiring a new group CFO, Gerhard Barnard, who seems to understand the task in front of him. A situation where CURN continues to grow, operating leverage and profitability remain strong, and management consistently reduces the share count would help juice returns in a big way. I look forward to seeing what Currency Exchange can accomplish in 2023 and believe there is still room for significant upside from here.
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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Greystone Capital - Currency Exchange Intl: Boring, Yet Incredibly Profitable