Cornerstone FS plc (LON:CSFS) is a provider of forex, payment and currency risk management services, with a focus on small and medium-sized enterprises (SMEs) internationally. Central to our investment case on the company, in addition to the favourable organic demand drivers that it is experiencing, has been management’s stated strategy to build market share and operating leverage through acquisitions of forex services providers. The company recently announced the acquisition of Capital Currencies for a total consideration of up to £3m. The transaction is expected to be earnings-accretive in the first year. Our DCF-implied fair equity value for Cornerstone is £15.0m.
- Organic growth has been strong: Cornerstone FS’s recent FY21 update confirmed that revenue growth had been ahead of expectations (+38% YoY), driven partly by the expansion during the year into the Asia and Middle East markets, as well as growing international business activity by its core SME customer base, a secular trend.
- Acquisitions are a core element of strategy: Management believes that a compelling opportunity exists to acquire smaller service providers in the forex market, yielding benefits in terms of customer footprint and growing transaction volumes through its core platform, which itself is being substantially developed.
- Capital Currencies is focused on direct sales: Capital Currencies is UK-based, focusing on larger SMEs and generating 90% of revenue through direct sales, with a strong margin profile. In the year to end-January 2021, the company posted revenue of £0.60m and PBT of £0.34m. NAV at this period-end was £0.12m.
- Strong incentivisation: The Capital Currencies management team will remain intact and onboard. The acquisition terms comprise an initial consideration of c.£0.59m, followed by two further tranches of payments based on the acquired company’s revenue performance. The maximum potential consideration is £3m.
- Investment summary: The acquisition was partly funded by an equity raise of £0.85m (gross) at 26.5p per share. The deferred consideration for Capital Currencies ensures that the talented management team remains focused on growing its business. Meanwhile, Cornerstone FS’s organic trajectory is favourable, both in terms of strong revenue growth and a sharp uplift in gross margin driven by the move to a greater proportion of direct sales. Our valuation approach centres on a DCF analysis for two primary scenarios. The implied fair equity valuation range is between £15.0m and £24.7m; the former now includes Capital Currencies, while the latter considers further acquisitions.
