Cornerstone: Steppingstone to core enterprise systems

Hardman & Co

Cornerstone FS plc (LON:CSFS) is a provider of foreign exchange (forex), payment and currency risk management services, with a focus on small and medium-sized enterprises (SMEs) internationally. As one of a handful of UK-listed companies in this segment, the company is well-placed to act as a consolidator in a highly fragmented marketplace. The core technology platform is a source of competitive differentiation in the SME segment, and this is being evolved to integrate with accounting systems, in turn evolving the revenue streams from transaction-based to subscription-based revenue. Based on our estimates for two scenarios, our DCF-implied fair equity value upside potential ranges from 140% to 360%.

  • Established forex provider: Following two acquisitions in the currency space during 2020, Cornerstone FS achieved a strategic pivot into the forex segment, and followed this up with a successful IPO in April 2021. The platform is highly scalable and cloud-based, and traction in adding enterprise clients is strong.
  • SME focus: The global forex market is the largest financial market in the world, by far. It is highly fragmented, but newer, technology-centric providers, such as Cornerstone, are taking share from the traditional banks encumbered by legacy systems. The company has a clear focus on the cross-border needs of SMEs.
  • Coherent and ambitious product roadmap: The platform is being developed to provide multi-currency e-wallets and seamless workflows between accounting systems and payments of all types, especially forex transactions. These developments would give the company competitive differentiation.
  • Acquisitions in prospect: Cornerstone FS 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 the FXPal platform. Discussions with potential targets are ongoing.
  • Investment summary: Our DCF analysis for the organic base-case scenario produces an implied fair enterprise value of £12.2m and an implied fair equity value of £12.5m (equating to 62p per share), compared with the current market capitalisation of £5.3m. Including our assumptions regarding planned acquisitions, the DCF suggests an implied fair equity value of £24.6m (equating to 121p per share), indicative of the potential benefits of the M&A strategy.
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