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Monday, June 20, 2022

Altisource (AAMC)

Altisource is a storied company that was part of the Bill Erbey complex (see this Forbes write-up) arising from the Great Financial Crisis. Right now, it is more or less a play on a set of 2 lawsuits- the most important of which is active in the New York Supreme Court. Last fall, Thomas Braziel and I discussed $AAMC with Andrew Walker at Yet Another Value Blog.


More or less, the story at the time was that lawsuits concerning the company's preferred stock were getting settled, and the remaining suit should as well. What would remain is a cash box with acquisitions coming in the alternative lending or crypto space. To this end, sound executives were coming on board and even MOVING to the US Virgin Islands. People generally don't pick up and move for something going bankrupt because of lawsuits. The basic math at the time was that the shares were trading in the mid to high 20s with a book value of a similar amount. A settlement could happen with the lawsuit, or there could be a business acquisition, and the stock could rip because it has a less than large float.

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>>>>Fast forward to today>>>>

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In my mind- the workout value of the company is ~$25/share vs. a current share price of $10.50- this gives no value to the business the company is developing in the lending space.

There have been a few developments, and generally, I think that the catalysts are getting closer.  

While the price of AAMC's stock has come down by more than 1/2, the story has not substantially changed. In my mind, that makes it a better deal with more of a margin of safety. As recently as last week and in the prior months, I have been adding to my position.

Here are the highlights.

*New Leadership at the company has me optimistic for its future. Jason Kopack began with the company in mid-May 2022 and has a storied past in the mortgage business. With former CEO Thomas McCarthy leaving the company (he had been interim CEO, so no surprise there), the company's strategic direction seems clear. This is nearly a pure-play alternative lending business that may also pursue a limited opportunity in Crypto ATMs with Forum Pay. In their investor presentation, the company expects ROEs on the crypto ATMs of 40%- if they can, then more power to them! Right now, this is a small aspect of the potential business and only has a commitment of $2 million dollars. For my valuation, I don't ascribe value to the crypto play other than getting it as a free call option.

*NYSE trading suspension- the NYSE suspended the company's trading on November 30, 2021. However, the issues with not having an operating business were fixed, and the company's stock resumed trading in March of 2022. More on this later in this write-up.

*More settlements with preferred stockholders have culminated- while not massive amounts, in January of 2022, some more minor preferred stockholders settled. 

"Altisource Asset Management Corporation (“AAMC” or the “Company”) (NYSE American: AAMC) today announced that it had entered into a settlement agreement (the “Settlement Agreement”) with two institutional investors related to the Company’s Series A Convertible Preferred Stock (the “Series A Shares”). Under the Settlement Agreement, the Company has agreed to pay the institutional investors approximately $665 thousand in cash in exchange for $5.79 million of liquidation preference of the Company’s Series A Shares (11.5 cents per dollar liquidation amount of the Series A Shares). As a result of this settlement, the Company estimates that it will recognize a gain of approximately $5.1 million to additional paid in capital in the first quarter of 2022. The resulting outstanding remaining liquidation preference of Series A Shares will be approximately $144.2 million, which represents the entire Luxor Funds position."

The terms are relatively similar to the settlement with Putnam in February of 2021

*Potential de-listing from the NYSE. On June 3rd, 2022, Altisource disclosed that the company received a deficiency letter from the NYSE. However, the company will submit a plan to eventually comply with the listing standards by June 30th. This may give them until November 30, 2023, to come into full compliance. Even if the NYSE doesn't accept the plan or the company fails to complete it, the shares will trade OTC- hardly the world's end. 

Here is a PDF where the NYSE talks about its listing standards. 


I generally believe that the de-listing has to do with Item(s) I-IV of the financial criteria section. The company needs to have $2 million - $6 million in stockholders equity if reported losses from continuing operations and/or net losses in the last 2 - 5 fiscal years. I personally think that the plans the company has in regards to its lending business will solve these loss problems. I also think the company will be able to develop a plan to solve the stockholder's equity issues. As an example, see this press release from March of 2022; the company noted that the gain on settlement of its preferred stock was recorded directly to equity. If there is a settlement with Luxor, it's reasonable to assume the same accounting treatment would occur, and the shareholder equity requirements of the NYSE would be met.

While the NYSE may see things differently than my logic, it is important to note that a de-listing where AAMC would trade over the counter is not the end of the world. While the company has a relatively small float, I have a hard time believing that many (if any) of the remaining shareholders have any restrictions or reservations about owning a company that trades OTC. 

*Insider purchases of stock to the tune of just under 10,000 shares. While not a tremendous amount (roughly $100K dollars), it is interesting to see the timing of the investments. These purchases happened on April 25th, 2022 (see pic), and were disclosed in this press release on April 27th, 2022.


Before these purchases, on April 22nd, the company released financial results and disclosed the following without much detail being given (underline mine):

The Company intends to bring a lawsuit against our former director, Nathaniel Redleaf, and Luxor Capital Group, LP and certain of its funds and managed accounts (collectively, “Luxor”), for among other things, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and breach of contract. The Company has taken steps to facilitate the filing of this lawsuit.

On April 29th, the company issued this bomb of a letter to the Judge in the New York Supreme Court case. In the letter, they wrote (underline Judge:

AAMC learned through discovery in this case that Mr. Redleaf repeatedly disclosed AAMC’s confidential information to his colleagues at Luxor who were managing a position in AAMC’s common stock of more than $200 million. The documents listed in Attachment A establish this conduct and show that Plaintiffs were trading in AAMC’s common stock while in possession of this information. AAMC intends to pursue claims arising out of Mr. Redleaf’s breach of his fiduciary duties. In addition, two of the documents on Attachment A relate to Luxor’s bad faith conduct that potentially gives rise to a contract claim. Moreover, these documents may be relevant to respond to any equitable arguments that Plaintiffs may raise in this case.

One of my favorite Twitter accounts is @NonGaap. While he has not been super active as of late, he regularly discusses incentives and how often disclosures are done so that members of the board or management can benefit. From my peJudgetive, this could have happened given the timing of the disclosures and purchases. See below for a highlight of the dates.

Friday, April 22, the company discloses they are bringing suit against a former director, Nathaniel Redleaf, for breach of fiduciary duty.

On Monday, April 25th, insiders purchase just under 10,000 shares of $AAMC stock for around $100K. 

Friday, April 29th, the company issued a letter to the Judge in the Luxor trial that seems to imply that the former director gave inside information to the Luxor. Not only that but Luxor, who is in a legal dispute, traded while in possession of that information...

While the judge would not let the company disclose the documents immediately, my reading is that the company can use them as part of its Summary Judgment Arguments. Those arguments will be submitted on or before July 19th, 2022.

*Allegations of insider trading and breach of fiduciary duty seem to provide Luxor with a solid incentive to settle the legal dispute with Altisource. See below for the letter concerning the emails that AAMC dug up in discovery.

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Why does this opportunity exist?

In my mind, the considerable selloff in shares of AAMC was due to investor exhaustion from the trading suspension that began on November 30th, 2022. The issues with not having an operating business were resolved with this press release on March 18, 2022. Because the company took action to form an alternative lending group, trading of Altisource's stock resumed on March 21, 2022. Imagine a shareholder base that couldn't buy or sell its stock for nearly 4 months... On the face of things, you would be pretty perturbed. I know that I wasn't exactly thrilled. Joshua Horowitz, a company shareholder who owns ~2% of shares outstanding, even filed a proxy expressing his frustration!

Something to keep in mind- it was evident that the company didn't have an operating business. It was apparent that they didn't have one for an extended period. The NYSE makes its listing requirements public- so should this suspension have been a shock? Probably not- however, I will admit, I was taken a little bit off guard. 

Regardless, the company worked to solve the problem. They even responded to the proxy from Mr. Horowitz rather than using the defense of an ostrich sticking its head in the sand, as many smaller companies tend to do. To me- the company's response and efforts to (successfully) fix these issues are about all that can be asked for. They now have an operating business- and it is one that I like! It seems to be relatively similar to Sachem Capital ($SACH), a lender where I owned both the equity and the baby bonds in 2020

In my mind, the other (and primary) reason for the lagging share price is the lack of a settlement with Luxor concerning the redemptions of the company's preferred stock- as such, let's look at the Luxor suit.

In March 2014, several parties gave AAMC $250 million in cash for $250 thousand preferred shares that come due in 2044 and yield 0% interest. As you can imagine, the present value of something due nearly 2 decades from today yielding nothing (literally, NOTHING) is not worth a lot. An income security becomes worth less in a rising rate environment when the discount rate increases. Additionally, rising rates typically mean good outcomes for alternative lenders. 

In March 2020, several preferred holders wanted to redeem their preferred stock. Luxor delivered a redemption notice to AAMC in late January 2020, saying so much.

The only problem was that Altisource didn’t have the legally available funds. There were ~$144 million in preferred redemptions to Luxor alone. This was when the company had ~$16.7 million in cash and only $49 million in assets as per its 10Q for the period ending on March 31st, 2020. The preferred share agreement clearly states that the preferreds only need to be redeemed in FULL. They refused to pay any preferred holders because AAMC was losing money and only had a fraction of the legally available funds. For quick reference- here is the definition of "legally available funds" from Law Insider:

Legally Available Funds means, as of any determination date, an amount equal to the aggregate gross asset value of the Fund as of such date, minus the sum as of such date of (i) the liabilities of the Fund, and (ii) the amount that would be neededif the Fundwere to be dissolved at the time of the Payment, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving such Payment; provided that no Payment shall be deemed to be made from “Legally Available Funds” if, after giving effect to such Payment, the Fund would be unable to pay its existing and reasonably foreseeable debtsliabilities and obligations, whether or not liquidated, matured, asserted or contingent, as they become due in the usual course of business. 

See below for the original complaint from Luxor. You can also access the file on the New York Supreme Court site


Luxor’s boiled-down argument seems that the company should have redeemed PART of the preferred shares.

To me, Luxor's argument seems to go directly against the language in the preferred documents. Ironically, the law firm representing Luxor (Akin Gump) also drafted the preferred share purchase agreement. I have spoken with several attorneys, who indicated that the document was sloppy, at best.

Here is the language in the preferred document from the 8K regarding the issuance:

Per the company's 10Q- AAMC is required to pay back the preferred stock holders out of funds legally available and is required to do so in the redemption of all, but not less than all of the issuance (see highlights).

As we move on in the trial, it seems that Luxor has stalled and held things up but a recently agreed to Joint Stipulation And Order that seems to have a Summary Judgement date more "set in stone" as all discovery is not finished. Check out the docket for yourself: As of now, it appears that summary judgment motions will be submitted on or before July 29th, 2022.

It seems customary for legal spats such as the one that Luxor and AAMC are in to settle right before they go to trial. Though, the allegations of breach of fiduciary duty and potentially trading of securities involved trading while possessing what seems to be material non-public information... That revelation seems that it could change the arithmetic of the case and cause a settlement before summary judgment arguments are submitted. If I was Mr. Redleaf or Luxor, I would very much so want this to be out of the public eye. The incriminating evidence seems to originate from emails found in discovery and can be part of the summary judgment arguments by AAMC. A settlement in the next month would help keep Luxor from getting some serious egg on its face. But who really knows- it seems that Luxor's preferred shares of AAMC are being held in a special purpose vehicle... so we will see.

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Moving on to the business side of things.

This Investor Presentation (see PDF below) was also beneficial for the company is laying out its vision for the future. 



In terms of action Altisource has taken, we can see the following on the operations side: the mortgage lending business seems to be humming along- more commitments, more loans under evaluation, and the company also recently hired a new head of sales. This should help them originate and sell high-yielding loans, which will generate more income for the company than just investing for yield with the loans that AAMC chooses to keep on their books. Another item that I found interesting is that the company can utilize its staff already employed in India for the mortgage business. While the new sales hires and such will affect margins, expenses for the new business won't seem as bad as they could have, given that the company was already employing some workforce. 

Highlights that I found to be highlights of the presentation:

-Secure Lines of Credit to leverage the initial capital commitment of up to $40 million to create origination/purchase capacity of $100+ million.

-ROE for the Alternative Lending Origination Platform after 120 days: Target 30%+

-ROE for Assets held on balance sheet: Target 12-15%

-An origination team is expected to be in place within 60-90 days and shortly thereafter it is assumed that loan origination volume will exceed $50 million a month

Please note that the company is trading substantially BELOW boot value (less than 50% in my estimate), so these returns will essentially be doubled concerning the company's current market cap.

Back of the envelope workout value, based on the numbers of their last 10Q:

YES... I know that I rounded; I know that there will be future litigation expenses; I know there will be SG&A; I know they could settle with Luxor for MORE than 11.5 cents on the dollar or not at all; I know that AAMC could even issue stock to Luxor as part of a settlement; I know they have acquired loans that are bearing interest... However, I will assume that the interim interest from the loans will make the company break even in the quarter and that going forward, the return metrics will start to look pretty decent. After all, with this "adjusted" book value of $25.53/share, with the share price currently at $10.50/share and a market cap of $21.64 million- it doesn't take a whole lot of loan origination and sales to make this thing really hum when they think they can get loan originations to over $100 million. 

I think that the fundamental uniqueness of the alternative lending business will shine in the interest rate environment that the country seems to be entering. When numerous lending institutions make loans harder to get as they begin to fear a recession, lenders generally just deny loans rather than increase the loan's interest rate to reduce demand for their product (herehere, and here). That is the situation in which a company like Altisource can come in and provide loans to real estate investors and the like at double-digit interest rates for a spectacular return. What will be really interesting is if the company can raise capital in a way similar to Manhattan Bridge Capital or Sachem Capital. My bet is that the answer will be "yes." AAMC already has a more impressive balance sheet than Manhattan Bridge Capital ($LOAN), and Sachem Capital has grown its balance sheet with the issuance of more than a handful of "baby bond" offerings. Sachem has even made issuances for OVER allotments! I see no reason why $AAMC will be unable to do this. 


In the meantime... We wait. I certainly like the dynamics of a cash box that is turning into a lending entity. This has exciting dynamics given the current rate environment and even has the potential to offer returns that are not correlated to the broader market. 

Sure, there is the risk associated with the lawsuit- however, I do not see how this would take the company to zero given the wording of the documents- "legally available funds" is pretty straightforward, and I feel comfortable investing in this. I generally think that there will be a settlement with Luxor in the next month before Summary Judgement arguments are due or in the month before oral arguments are heard by a judge on December 1, 2022.

EVEN IF the Luxor lawsuit ends up not getting resolved, Altisource will be able to lend more funds out and continue growing the business while the preferred stock receives a 0% yield until 2044. Given that the market is absolutely freaking out about interest rates- I can think of many less bad things than having a 0% fixed loan for the next 2 decades...

Disclosure: I own shares of AAMC.

Thursday, July 15, 2021

Currency Exchange International ($CXI/$CURN): Mis-Priced Covid Recovery Play

Every once and a while I like to put up guest posts on Ragnar (see this awesome one on $PMD). As such, here is a post from one of my favorite people: Chris Olin. He is one of the handful of people who helped keep me sane during COVID. We are both long the stock, and think that it is a really good price, for the flows of cash that should be coming. :)


Ticker: OTC: CURN; TSX: CXI


Market cap: $65M [1]


Net Cash: $53M


Enterprise Value: $12M


Last Share Price: $10.20

 


Currency Exchange International (“CXI”) is a fast-growing, unlevered reopening play whose main business was laid low by covid. After reducing its cost structure and taking share from competitors that have shut down operations, the company is poised to benefit from a recovery in international travel and a return to double-digit revenue growth. Valued at less than 9x FY2023 earnings, the stock has 130%-250% upside from here.

 


Business Overview


CXI operates in the US and Canada and is organized into two segments: ~85% of revenues are derived from physical banknote exchange and the remainder are from facilitating international payments. Geographically, ~80% of revenues are from the US and ~20% are from Canada.


The banknotes business physically exchanges foreign currencies for both retail clients (at high margins) and for wholesale bank/corporate clients (at low margins). This business was hit very hard by covid as it is heavily dependent on international travel. Covid-related revenue declines aside, this is a decent business with few competitors, from which CXI has been taking share for many years, growing revenues by ~10% per annum pre-covid [2].


The company’s main competitors in the wholesale business are large banks which enjoy the majority of the industry’s market share. However, smaller banks often prefer working with CXI because they don’t always feel comfortable securing their foreign currency from a direct competitor and most also don’t want to rely on a single vendor. The wholesale industry also largely competes on service, rather than price. CXI has an advantage here with smaller customers who are often not worth the larger wholesalers’ time.


Over the last decade or so, several wholesale bank competitors (e.g., HSBC, Bank of Ireland) have left the industry, largely because the small size of the revenues compared to those of their core banking businesses doesn’t justify the regulatory headaches. CXI’s main non-bank competitor, Travelex, also completely exited the North American market last year, partly due to covid and partly due to financial problems that pre-date covid. Despite the loss of competitors and CXI’s market share growth, the company is still a distant #2 (in Canada) or #3 (in the US) and has a lot of room to grow once transaction volumes return.


 

   Market Share Development





Source: Currency Exchange International.

 


Fortunately, the other business segment, international payments, has been unaffected by covid and continued its very rapid growth trajectory with revenues increasing by 29% in 2020 and 97% YoY in H1 2021. This segment was started from zero a few years ago and has quickly grown to become ~15% of the company’s revenues. Not all of this growth has been organic, as the company acquired a small Canadian payments business at the end of fiscal Q3 2020, but historical organic growth rates have been in excess of 25% and it is likely that this segment can continue to grow at ~20% per year for at least the next couples of years.


In the US, payments clients are primarily mid- and small-sized banks that don’t process enough international transactions to justify the costs of an in-house solution. The company also processes transactions for small non-bank clients in Canada that want a high-touch experience and don’t transact large enough volumes for the big banks to provide the desired service levels.


Compared to other non-bank fintech solutions, CXI is also a more attractive option for banks especially since the company is a regulated financial institution itself [3] and management has a long track record in the industry. CXI therefore offers its clients’ compliance departments peace of mind as well as cost savings. As in banknotes, a similar dynamic is at play in this segment as banks often prefer to work with CXI instead of outsourcing their payments business to a large commercial bank competitor. There is a lot of room for expansion in this segment and double-digit growth should be possible for quite some time.


 

Response to the Pandemic


As the banknote business sharply declined last spring, Management reacted quickly to cut costs by closing marginal retail stores, renegotiating rents, automating tasks (e.g., installing money-counting machines), combining overlapping roles, cutting salaries, etc., ultimately reducing operating expenses by about $2.5M per quarter as of the first half of FY2021.


A chunk of this reduction was due to variable costs and others that will increase again as the company gets back to historical revenue levels. However, it is likely that a return to FY2019’s $42M revenue level would be accompanied by at least a $1.75M-$2M permanent annual reduction in costs. That is quite significant given that the company only earned $3M in FY2019.


CXI has not only been playing defense, however. Since the pandemic began, the company has been aggressively signing new wholesale banknote clients onto their platform. Most of these were formerly Travelex customers and some were even referred to CXI by recent Travelex employees.


On the retail side, the company has expanded into locations that Travelex vacated using its agent model, where third-party retailers (e.g., Duty Free Shops) take banknotes for sale on consignment and share the economics with CXI. This has allowed the company to pick up some premier, high-volume airport locations that will likely be among the first to return to pre-covid volumes.


Management has also been winning new banknote business from foreign banks that need to source US dollars. This is a somewhat nascent business for the company, but it has the potential to become very big over time, potentially bigger than the legacy banknote segment.

While volumes from all these new clients and locations are currently small, the upside is that the base banknote business will be at least 15-20% larger than it was pre-pandemic once industry transaction volumes normalize. Furthermore, the company has also managed to raise prices on banknote transactions due to the reduction in competition.


As previously discussed, the payments business was unaffected by covid and grew 74% from the first quarter of FY2020 through H1 FY2021. Despite the difficulties in the larger banknote business, management continued to take steps to maintain the payment segment’s rapid growth, investing in additional salespeople and integrating the company’s offerings into additional banking software platforms (e.g., Jack Henry, Finestra, and Fiserv) that provide easy access to more potential clients.


 

Future Financials


CXI has very little debt and a sizeable net cash position of over $50M. Yes, some of this is inventory, but ~$25M is operating cash. The minimal debt that the company has is comprised of a couple revolvers that are used for working capital. Management has reduced the cash burn to $1-$2M per quarter, so the company can withstand a protracted period of reduced banknote transaction volumes if necessary.


However, the ongoing covid vaccine deployment, especially in North America and Europe, makes it likely we won’t have to wait too long for the company to return to profitability. 2022 will likely be close to a normal year and we are likely to see a full recovery in revenues by 2023.

Given the changes in the business in the last year or so, what might the company’s financials look like once industry banknote transaction volumes have returned to pre-covid levels? Perhaps the simplest method is to start with FY2019’s results as a baseline and add in cost savings and incremental growth from there.


In FY2019, the company enjoyed peak revenue of about $42M and $6.2M of EBITDA. The permanent covid cost reductions translate into $1.3-$1.5M of additional after-tax earnings [4], such that pro-forma “recovered” earnings start at $4.5M-$4.7M, all other things being equal. Yet we know that wholesale clients on the platform are up 15-20% over the last year and CXI is well positioned to capture much of the retail share formerly held by Travelex.


If transaction volumes are also up 15-20% over FY2019’s peak numbers in a normalized environment, then CXI should conservatively increase earnings on that additional volume by 15-20%. Banknote revenue was $39.1M in FY2019, so revenue from this segment might be $45M-$47M if the industry were fully recovered today. Add in a little more growth since the business will likely not be fully recovered for another year or so and we are likely looking at $53M-$56M of banknotes revenue in FY2023. Using the 11-11.5% profit margin implied by the new cost structure, the company is likely to earn an additional $1.5M-$2M in after-tax earnings from this growth. This assumes no operating leverage, but of course there will likely be some. [5]


That’s also just on the banknotes side. The payments business could easily be bringing an additional ~$7M of revenue over FY2019’s levels by FY2023. Several payments salespeople and support staff have been hired so far this year, so some, but not all, of the additional SG&A required to support this growth is already baked into our pro-forma baseline “recovered earnings [6]” number. Taking this nuance into account, a conservative analysis might indicate that this growth would add ~$2.5M in after-tax income over the next 2.5 years.


Adding it all up, the company is likely to earn $8.5M-$9M in FY2023, which compares very favorably to a ~$73M fully diluted market cap, especially for a company with a strong balance sheet that is experiencing double digit top-line growth.

 

  FY 2023 Earnings Waterfall





Source: Author; Currency Exchange International

 

Prior to covid, the company frequently sported an earnings multiple of over 30x. Given the company’s relatively small market share in each of its segments, its attractive historical growth rates, and lack of net debt, a return to that valuation level doesn’t seem unreasonable. On my estimate of FY2023 earnings, a 30x multiple implies a market cap of at least $255M or ~$35 per share, nearly a ~250% return from here. A more conservative 20x multiple still values the company at ~$24 per share, providing a ~130% return.


 

Risks


In the short-term the obvious main risk is around international travel in North America. If such travel comes back very slowly, that would definitely be a negative for CXI. However, with the vast majority of Canadians and Americans vaccinated, I think it will be a hard sell to continue to place restrictions on travel.


There is also a risk that regulatory costs continue to be a drag on the payments business. Management was surprised a couple years ago when Canadian regulators kept asking for additional processes that required expensive employees to be hired. This “start-up” phase of the payments business went on far too long and there was clearly a learning curve for the company that needed to be overcome. You can look back and see how investors were also surprised and punished the stock. While revenues continued to grow quickly during this period, earnings stagnated due to the fixed costs required by the new payments segment.


That being said, the company is quite confident now that they have the right systems, processes, and personnel in place to satisfy regulatory requirements and that there will not be large future increases in expenses in the payments business, or at least not any that are not tied to increasing revenue. Management has been wrong on this before, but we did not see any big increases in FY2020 or so far in FY2021, so I think the team probably has it right this time.


Looking out over a longer horizon, cash is losing market share in developed countries. The previous trend was steady and slow, but covid has accelerated it. Whether covid-related reductions in use of cash persist is an open question. That CXI has already started to see recoveries in volume with the limited international travel occurring is a good sign. The company has also been so effective at gaining banknotes market share that, while a reduction in the overall pie wouldn’t be ideal, it might not be so bad for CXI. This is probably the most significant risk to the thesis, however.


Central banks are also talking about and, in some cases, experimenting with digital bearer cash that is transferred via blockchain technology. This is a near-existential risk for the banknotes business, but Western central bank efforts are in still in the nascent exploration phase and it will take many years for any digital cash system to be implemented. There are many regulatory and privacy hurdles to overcome for digital cash to be successful and there is a good argument that any such system will be unworkable, at least in the US.

 

Conclusion

When the banknotes business recovers, the company will look quite attractive: double-digit pre-pandemic growth rates, a streamlined cost structure, minimal required capital expenditures, and reduced competition, all for less than 9x FY2023 earnings.

Regardless of when international tourists start coming back in significant numbers to North America (or more importantly, when the market starts pricing their return in), CXI will be poised to benefit with its larger client base. The company has plenty of liquidity, no net debt, and will have no problems waiting.


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 [1] All figures herein are in USD.

 [2] Note that banknotes revenue growth can be volatile, depending on whether any high margin “exotic” currencies are popular in a given year. This was the case in FY2018 when Iraq dinars and Vietnamese dong suddenly came into vogue, adding $1.65M in revenue that was not repeated in FY2019. Top-line growth in FY2019 therefore appears anemic if you don’t make any adjustments.

 [3] In Canada, the company runs its business through a regulated bank. While the US subsidiary is not a bank, the company and its management have decades of experience complying with AML and other relevant regulations, something that start-up fintech companies cannot claim.

 [4] 26.5% tax rate.

 [5] I’ve also glossed over the fact that banknotes revenue and payments revenue likely have different contribution margins, but payments was small enough in 2019 that I think this math still gets us conservatively in the right direction.

 [6] This additional payments SG&A is included in H1 FY2021’s results, which is our comparator for determining how much cost was taking out of the business vs. FY2019.


Wednesday, February 24, 2021

Thryv Warrants and Thryv Stock- A Value Creating Positive Feedback Loop

Please reference the Thryv post on RagnarIsAPirate, which can somewhat catch you up on the situation at my favorite company. Also, a notable update is the Sensis acquisition, and debt refinance... Thryv has been busy!

Sure, THRY has had a slight lag in growth, but that is reaccelerating, and the company is projecting that it will have over 200,000 subscribers to its SaaS business in the medium term (from here). That represents a more than 400% growth in SaaS subscribers in the coming years!

And while that is a HUGE deal... I want to talk about something else- Thryv Warrants and what they mean for the common stock. Because these warrants exist, I believe the company will be able to pay off its debt much sooner than is presently appreciated by the market. While there is not a ready market for the warrants, I have been actively buying them in private transactions. Yes, this post is technically about the warrants, but try not to focus on them as the overarching theme of this post. I am long shares of THRY, and think that these warrants give the stock some compelling upside AND downside protection.  In fact, I think that the presence of the warrants give the stock some “icing on the cake” so to speak. 🎂🍰🧁

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As you can see below in the company's S1 filing, Thryv has roughly 10.6 million warrants outstanding, which will convert to ~5.8 million shares of common stock. Currently, there are a hair more than 31 million shares outstanding, per the company's most recent 10Q. Normally, seeing that a company is facing dilution of ~18% from warrants is reason for pause. Let me explain why it is not.


Thryv’s legacy business (the Yellow Pages) is a melting iceberg, and is loaded up with debt. It seems that people who are not comfortable with the company's financials always gravitate to the debt load. The risk of the company not being conservative enough in correctly projecting the revenue decline of the Yellow Pages business is simply too much for them. As this relates to the warrants, I think that the dilution and concurrent cash infusion into the company effectively eliminates the risk of the debt blowing up the company, and will actually help the company make more acquisitions, as well as fund growth. Here is why.

The warrants, if exercised, will bring in A LOT of money into the coffers of the company. The math here is simple... If the stock trades for more than $24.39 between now, and August 15th, 2023 (2.5 years out!) and all of the 5.8 million warrants get exercised, that will bring in, in excess of $141 million dollars to the company coffers. Put another way, that is ~1/5 of the total debt that the company currently has. 


Per a recent Bloomberg release, related to THRY’s debt offering, the company is in the process of raising $700 million in debt. The goal is to refinance their current debt and to fund the acquisition of Sensis. It seems that the deal has been priced (again, per a Bloomberg news story), and is ready to go... Sure, the interest rate for the debt is high, but the company is cash flowing more than enough to cover the debt and principle payments. Additionally, this lets the company get a REALLY compelling deal done, as I will highlight below. Just think what the company could do, if these warrants exercise, and they use the cash to pay off debt! $100 million in cash would save the company $8.5mm a year in interest- and the next year, $9.22mm- and the next year, another $10mm... that’s pretty compelling, on top of paying down principle!




Aside from the savings on their debt- the BIG idea here, is that Sensis is a business that will help Thryv recruit paying customers to its SaaS business. The company has stated that when they began rolling out Thryv software to its Yellow Page customers, they had roughly 10% of them sign up for the SaaS offering. Sensis has about 130K customers, so, that would indicate roughly 13,000 new SaaS customers. Frankly, I would be all about them doing the acquisition JUST for the customers.

It’s a bold statement to make, but I do so, because this is a very interesting customer acquisition strategy- not only do they have experience doing this sort of customer conversion, but, they can bring value to a Yellow Pages style business that almost no one else can because of the Saas business they offer. Hypothetically, lets say that you assign no value to the cash flows of Sensis (hint- there will be cash flows), and allocate 100% of the $195mm purchase price to the 13,000 Thryv SaaS customers that the company hopes to gain. That’s ~$15,000 per user. The average Thryv user spends about $293/month or $3,500 annually- meaning that the acquisition cost per customer under some pretty conservative assumptions (ie they don’t grow their ARPU via ThryvPay or other offerings) is ~4.2x revenue. Thryv seems to be (per its presentations) at the critical mass where incremental increases in revenue have a huge impact to earnings and cash flow- so this acquisition has the potential to really bulk up the company. After all- another 13,000 customers would grow the current customer count by nearly 30%!

Keep in mind, this is happening in an environment when SaaS businesses trade for double digit multiples of revenue... And, I will admit that Sensis probably has fewer customers now, than it did last year from the melting iceberg effect- but the math still roughly works for whatever level of conversion and customers you want to assign. 

Because of the company being able to do deals like this, and provide value in ways that others cannot- I believe that Thryv will at some point make a play for other Yellow Pages companies. Specifically, I think that they will make a play for Yellow Pages Canada once Y.TO pays off the remainder of their debt in the coming months. Yellow Pages Canada has already begun declaring dividends- which seems to be a way of prepping the company for a sale this coming summer or fall. 

One last thing: let's take a minute to look at the incentives of the company, via a screen shot below of the recently repriced executive stock options. I have talked about the repricing of the executive stock options before, so, I will not get into the logic of the reprice in this write up.


You will note, that the warrants conveniently expire 6 months after the first set of executive stock options expire, and 6 months before the next set, for the company's CFO. the net value of the stock options, at the exercise price of the warrants, is $10.57/share, and when you multiply that by the ~37,000 shares he is entitled to buy in that first swing, that's a total of $391K... And the more the stock goes up in that time, the better the warrants will do, and the better the stock options will do. 


Furthermore, if you look at the options that are expiring in the year surrounding the warrant expiration, the amount of exposure for the executives DOUBLES... For the CFO, that means that there is over $782K on the line...


It gets even more interesting for the company's CEO, Joe Walsh:


His more than 1.1 million stock options start to expire in monthly installments, as of January 1, 2021... Meaning that for ~87.5% of his options, they all expire BEFORE the end of the warrant exercise date. 

Here is a link to a spreadsheet highlighting the option setup for the executive team, as well as a screen shot.



If exercised at the price of warrant exercise, the total value for all executive stock options is ~$17 million dollars, and the value of the options expiring just in the year of warrant expiration is $5.67 million... If the price of the stock goes up to $30 (just $7 more than the current price) this would ensure that the warrants get exercised, the company gets infused $141 million to play with (pay down high interest debt), and the executives would make over $26 million dollars. 

So as to say... the incentives seem VERY interesting here, and in my mind, kind of acts to weight the scales to more money to be coming into the company because of the various incentives surrounding the warrants. This should significantly mitigate any risks that the company has with declining revenues and debt, which eliminates risk. It will also give the company some firepower to potentially acquire the Yellow Pages in Canada (Y.TO) to further get customers and grow the SaaS business. Furthermore, the company seems to have a decent shot of getting included in the Russell Indexes at some point as Dex Media had been in the past. This would create demand for the stock that would also help the price rise due to what is in essence, forced buying. This is awesome as it relates to the exercise of the warrants, and thus the overall strategy of the company to grow and deleverage.

Oh... and one last thing that just came out in the most recent earnings guidance from the company. They have released a large amount of the valuation allowance for the company's tax asset. Generally, a company cannot do this without some really compelling reasoning. In fact, there are a lot of scenarios where they wouldn't WANT to do this. Can you imagine the auditors' scrutiny that this would have had to go through? The company was at one point bankrupt in the past 5 or so years, has a side of the business with declining revenue, and a credit rating that gives them junk bond status.... Yet, the company’s auditor is comfortable enough to let them release over $100mm in tax valuation allowances. If this doesn’t scream “Thryv is earning money and that shouldn’t stop anytime soon” I don’t know what does.




I believe that individually, some of the items I bring up may not mean much... BUT, when combined, and looked at in their totality, these points should act to propel the stock price significantly higher. Because of this, it is my belief that these cumulative factors have created the setup of a reflexive virtuous cycle that will richly reward the executives, shareholders, and customers of the company.

Now, if the company can just get these warrants to trade- that would be amazing... This way, arbitrage funds can come in, buy the warrants at a slight discount, and exercise them. This would bring money into the company sooner, rather than later...

Disclosure: Long THRY and THRY Warrants.