Investments In Kyriba And Alessa Will Improve Operational Efficiency

Key Takeaways

• Integration with FedNow and technological investments aim to boost SaaS income, improve operational efficiency, and drive revenue growth.
  
• Strategic focus on U.S. market expansion and potential divestiture enhances profitability, net margins, and earnings.
  
• Declining wholesale revenue, rising expenses, nonrecurring losses, and dependency on Exchange Bank of Canada pose significant risks to the company's financial stability.

Catalysts

Together with its subsidiary, Exchange Bank of Canada, provides foreign exchange technology and processing services in Canada and the United States.

• Currency Exchange International's integration with the FedNow system, facilitating automated domestic payment processing for financial institution customers without direct money movement, is expected to drive Software-as-a-Service income and expand international services, potentially boosting revenue and earnings.
  
• The strategic review of Exchange Bank of Canada to explore divestiture or other options aims to refocus company resources on profitable U.S. operations, potentially enhancing net margins and profitability.
  
• The expansion of the online FX platform to cover more U.S. states, combined with increased marketing efforts and enhanced checkout processes, could drive growth in direct-to-consumer banknotes and improve revenue.
  
• The focus on operational efficiencies through technology investments, such as Treasury Management System Kyriba and AML software Alessa, aims to decrease operating expenses, thereby improving net margins and earnings.
  
• Strategic geographic expansion through selective retail and agent partnerships in key U.S. locations aims to bolster growth in the banknotes segment, supporting increased revenue and overall company earnings.

Currency Exchange International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Currency Exchange International's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 25.7% in 3 years time.
• Analysts expect earnings to reach $24.6 million (and earnings per share of $3.52) by about January 2028, up from $2.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.1x on those 2028 earnings, down from 39.2x today. This future PE is lower than the current PE for the CA Consumer Finance industry at 32.2x.
• Analysts expect the number of shares outstanding to grow by 3.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.77%, as per the Simply Wall St company report.

Currency Exchange International Future Earnings Per Share Growth

Risks

• The company is experiencing declining revenue in its wholesale banknotes segment, notably due to reduced volumes from key U.S. customers, which could negatively impact future revenues.
  
• Operating expenses have increased significantly by 10% over the past year, outpacing revenue growth of 4%, suggesting that cost controls are not keeping pace and this could impact net margins.
  
• The net loss reported in the most recent quarter, largely due to nonrecurring items in Canada, points to potential volatility in earnings.
  
• There are concerns about nonrecurring regulatory penalties and tax charges in Canada, which have impacted earnings negatively and may continue to pose risks to net margins if ongoing compliance costs rise.
  
• The dependency of the U.S. payments business on Exchange Bank of Canada, which is undergoing a strategic review, introduces a potential risk to revenue continuity should any structural changes affect their primary payment processing relationship.

Valuation

• The analysts have a consensus price target of CA$30.0 for Currency Exchange International based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $95.7 million, earnings will come to $24.6 million, and it would be trading on a PE ratio of 6.1x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of CA$22.25, the analyst's price target of CA$30.0 is 25.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.