IMXI - International Money Express: Sustainable Growth Opportunity At Low Valuation Multiples

2023-12-05 07:24:32 ET

Summary

• International Money Express (Intermex) is a financial services company specializing in money transfer services.
• Intermex focuses on facilitating cross-border remittances between the United States and Latin American countries, where it has found a strong niche to position itself and grow.
• The Latin American and Caribbean market is large, but international expansion towards Africa and Asia promises tailwinds for growth in the coming years.
• The current valuation seems attractive, offering double-digit returns according to my conservative estimates.

Investment Thesis

International Money Express (IMXI) is a company that has experienced a roller coaster ride, declining by 26% following its second quarterly report for fiscal 2023 and subsequently recovering another 26% in the months following its third quarterly report.

In this article, we will delve into the aspects of the business model that exhibit attractive characteristics for the current environment, marked by considerable economic uncertainty. Simultaneously, the upcoming years appear promising due to certain growth drivers that we will discuss throughout this article. Additionally, I will conduct a valuation to justify why I believe, despite the significant recovery, it remains an attractive investment for the long term.

Business Overview

International Money Express (Intermex) is a financial services company that specializes in providing money transfer services. Intermex focuses on facilitating cross-border remittances, allowing individuals to send money to family and friends in other countries.

The company operates in the United States and various Latin American countries, leveraging the immigration of Latin Americans to the United States to establish itself in a strong niche within the international transfer market. Between 2015 and 2020, 25% of immigrants to the United States were Mexican and according to a study by The Immigrant Learning Center , 66% of the foreign population living in the United States is part of the country's workforce, higher than the 62% of US-born citizens who are part of the workforce.

This is crucial for the United States since, being such a developed and mature economy, a shift in the growth of the population is underway. Various studies predict that the population, calculated as births minus deaths , will begin to decrease in the coming decades. However, if immigration policies remain favorable, the workforce should remain stable due to foreign workers. Consequently, these workers may, at some point, need to send remittances to their respective countries and IMXI would have tailwinds to continue operating for several more years.

As mentioned earlier, a significant portion of immigrants to the United States are Mexican, often crossing into the country in search of job opportunities. Due to the family-oriented Latino culture, these workers frequently continue to send money to family members who remain in their native country. It's no coincidence that Mother's Day (celebrated on May 10) is one of the peak months for remittance receipts in Mexico. The country consistently reports increasing income from remittances each year, a trend that, if it continues, would be an indicator of the demand for Intermex services .

International Growth Opportunities

Although the Latin American and Caribbean (LACA) market is quite large and attractive, the company sees expansion opportunities in the rest of the world, with Africa and Canada being notable among them.

Canada appears as an obvious region, with around 20% of the population being immigrants, in contrast to the United States where this figure is less than 14%. However, Africa is also a compelling opportunity that should not be underestimated.

Firstly, Africa has a rapidly growing population, and a large portion of this population is young. This demographic trend presents a significant consumer base that can drive demand for various services, including remittance services and consumer-to-consumer transactions. Secondly, according to the Global Findex Database , some of the most populous countries in Africa continue to have low inclusion of financial institutions. For example, in Niger, a country with almost 200 million inhabitants, only 45% of middle-income residents have a bank account, compared to 100% in the UK, 95% in the US, or 89% in China.

Furthermore, according to the World Bank , in the coming years, there could be significant migration from certain areas of Africa due to water scarcity, intolerable heatwaves, among other factors. All this migration, whether within the continent or internationally, would serve as another catalyst for Intermex's growth in this region. It is not surprising that during Q3 2023 , Western Union, which does have a presence in Africa, reported a 42% year-over-year revenue growth, compared to -10% in Europe and -3% in North America.

Money Transfer Services During Crisis

The resilience of businesses in this sector is exemplified by their performance during the 2008 financial crisis, one of the last major downturns in the United States and globally.

While International Money Express ( IMXI ) was not listed during this period, similar companies like Western Union ( WU ) and MoneyGram ( MGI ) were. Western Union's performance in 2009 showed a mere 4% decrease in revenue, maintaining EBITDA margins. In contrast, MoneyGram faced more significant challenges with a 5.9% revenue decline in 2008, further dropping by 8.6% in 2009. This underscores the importance of quality and scale , as MoneyGram, with significantly lower revenue and consistently lower margins, suffered more than Western Union. It also demonstrates that a well-managed company can navigate through a crisis with relative ease. Individuals who send remittances often prioritize supporting their families, irrespective of economic conditions, thereby ensuring a stable income for the top performers in the sector.

Presently, IMXI stands as the smallest competitor when comparing these three companies, but its growth outpaces both. This suggests it may be gaining market share . While IMXI's margins are lower than Western Union's, they have proven more profitable than MoneyGram. Despite being a smaller company, IMXI competes directly with larger counterparts and has successfully carved out a place within the sector, a significant achievement in anticipation of a potential economic crisis.

Key Ratios

As we noticed earlier, the company is currently in a phase of growth and market share acquisition. Indeed, revenue has been growing at a rate of 22% annually since 2015, and this growth has proven to be quite profitable. The EBITDA margin has consistently remained around 16%, and while the Free Cash Flow has shown some fluctuations, it has generally hovered around 10%.

The company has financed its operations through a combination of debt and internally generated cash. This capital has been strategically reinvested in the business, a prudent move given the interesting growth opportunities. Additionally, 16% of the capital has been allocated to share repurchases, especially in the last year, as the company seems to be trading at historically low multiples , specifically at 8x EBITDA.

As mentioned, the company has primarily focused on organic growth. A key metric to gauge the value generated from this investment in growth is the return on capital employed ratio. In this case, the company has maintained consistently high levels, around 25%. This not only indicates ongoing growth and potential opportunities for further expansion but also signifies a highly profitable business generating significant value-a compelling combination for sustainable and profitable growth.

Regarding debt, it is noteworthy that the company maintains minimal leverage. Currently, its net debt is practically zero, a trend the company has historically upheld. This prudent approach provides ample reassurance for Intermex to continue its growth trajectory without jeopardizing its financial health.

Valuation

For the valuation, I will employ a relatively straightforward estimate based on revenue and margins. In the last conference call, the company mentioned an anticipated growth of 10% for the current year, projecting revenue of around $600 million. I will use this growth rate for subsequent years, although it might be considered conservative given the historical growth.

Subsequently, I am estimating slightly lower margins for this year based on the figures from the last twelve months. For the following years, I anticipate an expansion to 18% EBITDA and 10% Net Income, margins that the company has previously achieved.

This estimation would result in an expectation of $160 million of EBITDA and earnings per share of $2.4. Assigning exit multiples of 10x EBITDA and 15x P/E ratio, in line with the historical performance of IMXI and competitors such as Western Union, we could anticipate an attractive yield of 13%. This is based on a conservative valuation considering growth and margins, suggesting there is a margin of safety for potentially even better returns in the coming years.

Final Thoughts

It appears to me that International Money Express is a robust business , providing security even in a hypothetical recession. It demonstrates consistent profitability, boasts an exceptionally large potential market that positions it for sustained growth over many years, and currently carries a valuation that seems more than reasonable , with a margin for safety.

As for risks , the main one I see is the lack of differentiation compared to its competitors. There is really little in which the company can differentiate itself from the service of a competitor, although it is true that the barriers to entry are not exactly low, since you require sufficient scale to be a real alternative for your consumers, as well as a good reputation. that your service is reliable.

Until very recently, the company's shares were available at $15 USD, representing a genuine bargain. Despite a nearly 30% increase after a positive quarterly report, I still find the current price to be attractive. Consequently, my rating for the company is a ' buy '.

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