CA - Plural Investing - Currency Exchange Intl.: Post-Tax Returns On Tangible Capital Likely To Double
2023-03-07 23:00:00 ET
Summary
- Currency Exchange Intl. earns post-tax returns on tangible capital of 35% today which we think is likely to double as travel recovers and the company's new businesses bear fruit.
- We estimate this market is worth around $380mm in annual revenues and that CXI will win $40mm of this in three years.
- We think that at today's stock price downside over a three-year horizon is limited, while the upside if the company's value becomes appreciated is substantial.
The following segment was excerpted from this fund letter .
Currency Exchange International ( CURN )
CXI is one of only three major suppliers of foreign banknotes in the United States (such as € or £) and of US dollar banknotes internationally. Banknotes are typically used for travel, and the Covid induced downturn masked major market share gains made by the company after its key competitor Travelex exited. The company earns post-tax returns on tangible capital of 35% today which we think is likely to double as travel recovers and the company's new businesses bear fruit. CXI is run by its Founder Randolph Pinna, who owns 21% of the company and has high integrity, delights customers, and a 35 year track record of building two banknotes businesses that have delivered strong shareholder returns. The company trades on 7x net profits today and just 2.5x our estimate in three years. We started buying shares at $14/shr (for its US listing CURN) earlier this year, it trades at $16.5/shr today, and we believe intrinsic value will be $70/shr in three years time. It is our largest position.
We believe that CXI's Founder Randolph Pinna is the best operator in the industry. Pinna is an entrepreneur with the rare combination of a high energy 'can do' attitude but also a frugal and conservative approach to long term decision making. Over the last five years Pinna has succeeded in building a banking subsidiary in Canada, which has depressed profits until now, but we believe will increasingly be recognized by investors as central to driving substantial earnings growth for years to come.
The Canadian bank has enabled CXI to become one of only three companies exporting US dollars from the Federal Reserve across the world. We estimate this market is worth around $380mm in annual revenues and that CXI will win $40mm of this in three years. That compares to the company's total revenues of $42mm in 2019. We think this opportunity is greatly underappreciated by investors because the global banknotes industry is incredibly opaque and there is a misconception that the banknotes market is declining.
CXI's growth is being further enabled by the decline of its key competitor Travelex. Travelex was the second largest exporter of dollars but has mostly exited after fraud was discovered at its parent company. Bank of America is the largest exporter but has been retrenching for some years and accelerated that retrenchment as a response to Covid. The third player is the newcomer Moneycorp, which is growing rapidly and has a banking license in Gibraltar. CXI's Canadian bank gives it greater credibility and an advantage.
Travelex has also exited the US domestic market, which has allowed CXI to pick up many of its airport locations at favorable terms. The company was not in the airport business preCovid, but today is the sole supplier of foreign banknotes to US airports.
CXI now also faces limited competition in its traditional business of supplying banknotes to US banks. The two other suppliers in the market are Bank of America and Wells Fargo, yet these large banks carry high compliance costs that makes it unprofitable for them to focus on smaller clients. Travelex used to compete with CXI for these smaller clients, but now that it has exited CXI faces little competition. While cash use is declining, the growth in foreign travel and CXI's market share gains means its business will likely grow for many years.
These various underlying gains that CXI has made over the last couple years have been very substantial but masked by the Covid induced travel slump. The company reported record earnings in its latest quarter as much of that receded, and we think that earnings will continue to surprise investors as the benefits of its increased market share and new businesses come through.
There are some risks with an investment in CXI. Trading banknotes comes with AML and KYC dangers, which is why the company is only targeting lower risk jurisdictions in its expansion globally. Being a small player also limits the size of transactions it can do, but the company's growth potential is still substantial. And it will be important that Pinna allocates the cash we expect the company to generate well. Nevertheless, we think that at today's stock price downside over a three year horizon is limited, while the upside if the company's value becomes appreciated is substantial.
Important DisclosuresThis material does not constitute an offer or solicitation to purchase an interest in Plural Partners Fund LP (the Fund"), or any related vehicle. Any such offer will only be made via a confidential private placement memorandum. An investment in the Fund is speculative and is subject to a risk of loss, including a risk of loss of principal. There is no secondary market for interests in the Fund and none is expected to develop. No assurance can be given that the Fund will achieve its objective or that an investor will receive a return of all or part of its investment. This material is confidential and may not be distributed or reproduced in whole or in part without the express written consent of Plural Investing LLC (the "Adviser"). The performance results shown and discussed herein represents the performance of the Fund, a vehicle managed by the principal of the Adviser (the "Principal"). The Fund began trading on April 1, 2020. "Gross" results shown reflect the deduction of transaction costs actually incurred but are before management fees or performance allocation were incurred. "Net" results shown reflect the deduction of a 1.0% per annum management fee and 20.0% performance allocation. Results are compared to the performance of the MSCI World Net Return Index, or similar indexes (collectively, the "Comparative Indexes") for informational purposes only. Returns data for the HFRX Global Hedge Fund Index are from source: Hedge Fund Research, Inc. www.hedgefundresearch.com, © 2022 Hedge Fund Research, Inc. All rights reserved. Past performance is not necessarily indicative of future trading results. The Fund's investment program does not mirror the Comparative Indexes, and the volatility of the Fund's investment program may be materially different from the volatility of the Comparative Indexes. The securities or other instruments included in the Comparative Indexes are not necessarily included in the Fund's investment program and criteria for inclusion in the Comparative Indexes are different from those for investment by the Fund. The positions presented and discussed herein represent investments in the Fund as of the date listed. These positions are presented for informational purposes only to demonstrate a portfolio allocation of the Principal as of a recent date. Results of large "contributors" to the Fund's returns are also included for informational purposes only. No representation is being made that the Fund will or is likely to hold the same or equivalent positions or allocations in the future. Certain information contained in this presentation is derived from sources believed to be reliable. However, the Adviser does not guarantee the accuracy, completeness, or timeliness of such information and assumes no liability for any resulting damages. Due to the ever-changing nature of markets, the deductions, interrelationships, and conclusions drawn from historical data may not hold true in the future. This material contains certain forward-looking statements and projections regarding market trends, Fund allocation, and investment strategy. These projections are included for illustrative purposes only, are inherently speculative as they relate to future events, and may not be realized as described. These forward-looking statements will not necessarily be updated in the future. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. |
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Plural Investing - Currency Exchange Intl.: Post-Tax Returns On Tangible Capital Likely To Double