The following segment was excerpted from this fund letter.
Currency Exchange International (OTCPK:CURN)
CURN continued to be our best performer in 2022 notching up a ~56% return in the face of volatile underperforming markets, and up another 18% in 2023. Last year we wrote to you about our forward estimates for this company:
“We believe by 2024-2025 time period, with the return of the Banknote revenues to higher than pre Covid levels of $40-45mm and continued growth in Payments revenues to $15mm to $25mm, the company can achieve a revenue run rate of between $60mm to $70mm. While we don’t expect the cost base to stay at $30mm, as we mentioned this is a substantial operating leverage opportunity and we expect this $60mm market cap/$10mm Enterprise Value company to generate $15-$20mm in Free Cash Flow within the next 24 to 36 months”
We are excited to share with you, that while we expected these results a few years out the company was able to achieve 117% revenue growth in 2022 to $66mm, which is close to 60% over its 2019, pre-Covid, peak. How did we get there? The biggest surprise for us came in the strong performance of its Banknotes segment growing 136% to $53.9mm. In the past, this was a sleepy segment, managing non-airport-based 30+ foreign exchange kiosks in the US and Canada and generating $42mm in revenue in 2019.
With the Covid-related North American bankruptcy exit of its biggest competitor, TravelX, CURN was able to slowly take over airport locations as a franchisor, i.e. no capital commitments; helped by the return of travel as well as general inflation both in exchange spread and average transaction size. We believe these dynamics as well as a near monopoly in North America, and room for branch expansion will continue to fuel double-digit growth for the retail portion of the Banknotes segment in the intermediate future.
The other portion of the Banknotes segment is the wholesale portion which was mostly nonexistent in 2019. However, in the last two years, the company has been approved by the Federal Reserve under its Foreign Bank International Cash Services (FBICS) program, after a lengthy due diligence process, and is now one of two companies in the US that can provide international banks with US currency. In other words, if you are say UBS and you need $25mm of US currency CURN will happily provide this service.
This business likely provided mid-single digit millions in revenue in 2022, up from zero in 2019, and we believe can reach tens of millions of dollars in revenue in the intermediate future. The more interesting question one has to ask is if CURN is balance sheet constrained i.e., will it need more capital to grow this business? While there are transactions in the $50mm to $100mm size, which requires a bigger balance sheet than CURN currently has, those are few and far between and most ticket sizes are in the low tens of millions. In other words, CURN can continue to grow this segment without substantial capital additions other than natural working capital growth.
In the Payments segment, also nonexistent in 2019, the company grew 61% to $12.5mm as it continued to grow its Canadian and US existing relationships. The company’s proprietary software CXIFX helped grow transaction volumes by 38% and transaction amount by 47% in 2022, with more profitable transactions in the last year driving revenue growth ahead of volume.
One of the things we have talked about substantially in our letters in the past is our fondness for finding a business with substantial operating leverage, i.e. where revenue growth is substantially ahead of expense growth. CURN is a prime example of this strategy as it grew its revenues by $35mm in 2022, while expenses grew by only $17mm resulting in a 50%+ contribution margin and ~ $19mm in operating profit. Pretty remarkable that this company has been able to achieve these numbers two years ahead of our original projections.
So where do we go from here? We believe that in the intermediate future, the company can continue to grow revenues at 20%+ growth rates with the resulting growth in profits at 30%+. This is a well-run company, with a well-respected and incentivized founder CEO, a new experienced CFO, and a $100mm+ market cap which should earn over $25mm in operating income in 2023. More recently CURN’s direct, private equity owned competitor, Moneycorp was put up for sale by its ownership with asking multiples at 12-13x EBITDA (note, we are using operating income as our valuation basis).
If this transaction is successful we expect this $120mm market cap company, with approximately $40mm in excess cash (and over $80mm in total cash), to re-rate in the $40 to $50 per share range. However, we continue to monitor the company’s capital allocation plans as we believe its conservatism and lack of a clear plan, other than potential acquisitions, may hinder its near-term stock price appreciation. To that end, we have engaged in substantial friendly discussions with management on the company’s capital allocation plans and shareholder communication.
The Partnership’s performance is based on operations during a period of general market growth and extraordinary market volatility during part of the period, and is not necessarily indicative of results the Partnership may achieve in the future. In addition, the results are based on the periods as a whole, but results for individual months or quarters within each period have been more favorable or less favorable than the average, as the case may be. The foregoing data have been prepared by the General Partner and have not been compiled, reviewed or audited by an independent accountant and non-year end results are subject to adjustment.
The results portrayed are for an investor since inception in the Partnership and the results reflect the reinvestment of dividends and other earnings and the deduction of costs, the management fees charged to the Partnership and a pro forma reduction of the General Partner’s special profit allocation, if applicable. The General Partner believes that the comparison of Partnership performance to any single market index is inappropriate. The Partnership’s portfolio may contain options and other derivative securities, fixed income investments, may include short sales of securities and margin trading and is not as diversified as the indices, shown. The Standard & Poor’s 500 Index contains 500 industrial, transportation, utility and financial companies and is generally representative of the large capitalization US stock market. The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index and is generally representative of the small capitalization U.S. stock market. The Russell Microcap Index is comprised of the smallest 1,000 securities in the Russell 2000 Index plus the next 1,000 securities (traded on national exchanges). The Russell Microcap is generally representative of the microcap segment of the U.S. stock market. All of the indices are unmanaged, market weighted and reflect the reinvestment of dividends. Due to the differences among the Partnership’s portfolio and the performance of the equity market indices shown above, however, the General Partner cautions potential investors that no such index is directly comparable to the investment strategy of the Partnership.
While the General Partner believes that to date the Partnership has been managed with an investment philosophy and methodology similar to that described in the Partnership’s Offering Circular and to that which will be used to manage the Partnership in the future, future investments will be made under different economic conditions and in different securities. Further, the performance discussed herein does not reflect the General Partner’s performance in all different economic cycles. It should not be assumed that investors will experience returns in the future, if any, comparable to those discussed above. The information given above is historic and should not be taken as any indication of future performance. It should not be assumed that recommendations made in the future will be profitable, or will equal, the performance of the securities discussed in this material. Upon request, the General Partner will provide to you a list of all the recommendations made by it within the past year.
This document is not intended as and does not constitute an offer to sell any securities to any person or a solicitation of any person of any offer to purchase any securities. Such an offer or solicitation can only be made by the confidential Offering Circular of the Partnership. This information omits most of the information material to a decision whether to invest in the Partnership. No person should rely on any information in this document, but should rely exclusively on the Offering Circular in considering whether to invest in the Partnership.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.