Banxa: growth, value or both?

Overview

Banxa Holdings Inc. ("Banxa") is a publicly listed company that facilitates the conversion of traditional currency to cryptocurrency. It enables investors to capitalise on the widespread adoption of digital currencies, without making a directional bet on an individual token.

Banxa has partnered with the top digital currency exchanges globally. The company's customers include global digital currency exchanges such as Binance, Kucoin, ByBit, MXC and Phemex. While the reason why a large multinational company like Binance may want to use Banxa varies, there are typically a few reasons:

1. KYC and AML Administration:

  •  Banxa provides the exchange a "reg-tech" service. This ensures it is licensed and operationally equipped to process large volumes of payments, setting Banxa apart from other cryptocurrency payments providers.

2. Charge-Back Risk:

  •  Banxa underwrites the risk of fraud and default, so the exchange is no worse off should a customer default or be defrauded.

3. Scalability of Payments Service

  •  Banxa operates in over 130 countries and has established infrastructure in all of them. Such infrastructure includes the low-fee and local payment option PoLi (in Australia), SEPA (in Europe) and Flexepin (in Canada). On a global scale, Banxa supports Mastercard, Visa, and Apple Pay.
  • By building this payments infrastructure across jurisdictions, Banxa has created a scale offering, allowing the exchange to benefit from Banxa's expertise.

Operating Performance

Banxa generates revenue via commission on the Gross Transaction Value (GTV). The company's largest customer segment is a B2B service, which charges a fee of up to 3%. Over the last financial year, Banxa has increased its GTV by 517%. The company's revenue has grown along with volumes:

Banxa is levered to an exponentially growing GTV. The daily spot volume of cryptocurrencies traded each day exceeds US$50bn. It has partnerships with the top exchanges and is well positioned to capitalise on the growing volume of traded cryptocurrency. Banxa is currently operating at a sub-scale 5% EBITDA margin, and we expect this to improve as the company matures.

We expect that exponential growth in transaction volumes will flow to revenue, with potential for operating leverage and incremental margins as Banxa scales.

Investment Case

  1.  Organic growth with a long runway

Banxa has continued to expand, recently partnering with "Gate.io", which is one of the world's ten largest cryptocurrency exchanges by voluume, "Hoo.com", and "Lbank." "Gate.io" and "Lbank" both have an average daily trading volume exceeding US$1bn. Whilst there are over 300 cryptocurrency exchanges, the top three account for 81% of all trading volume (US$49bn): Binance (US$33.6bn), Huobi (US$8.9bn) and OKEx (US$6.6bn).

Daily cryptocurrency spot volume currently fluctuates around US$1T per month (YTD), and is expected to grow over time.

This trading volume has increasingly concentrated amongst Binance, Huobi, and OKEx, all of which are currently partners of Banxa. The continued consolidation of key partners is predicted to facilitate Banxa's GTV growth, in line with cryptocurrency volumes.

Additionally, Banxa has expanded into different coins. It has added 17 new coins since March 2021, with a combined daily trading volume of US$8.5bn, including: AAVE, Dogecoin, Enjin Coin, CELO, Avalanche, Compound and MATIC/Polygon. This brings the total number of supported cryptocurrencies to 23.

Whilst Banxa principally supports fiat currency to cryptocurrency (on-ramping), it has recently announced functionality allowing conversion from cryptocurrency to fiat currency (off-ramping). This additional service will likely further increase their attraction to end-users and overall volumes (albeit remain a smaller percentage of volumes versus on-ramping).

Finally, the rate of cryptocurrency adoption is accelerating. Internet adoption took 7.5 years to go from 130 million to 1 billion users, where as Bitcoin may achieve that scale in the next four years. The current number of users worldwide is 221 million, an increase of over 200% in the first half of 2021. VP Capital expects growth in user adoption to drive GTV and revenue growth.

2. Current market valuation is at a discount despite growth

Banxa is trading at a substantial - and in our opinion, unjustified - discount to direct comparables in the cryptocurrency payments sector:

  • Simplex was acquired for 0.5x GTV of US$500m;
  • Moonpay is valued at US$3.4bn at 1.7x GTV. Estimated GTV is currently US$2bn;
  • Ramp, which is a higher-risk start-up with immaterial GTV, raised funding at a US$300m valuation.

Banxa is valued at just C$177m and 0.3x GTV, despite it being on track to generate over A$1bn in annualized GTV.

Banxa has the potential to be reach a greater valuation based on these direct comparables, as well as indirect comparables like PayPal and Square. This would imply a valuation up to C$1bn, compared to the current market capitalisation of C$177m, some of which is backed by net cash.

Comparing Banxa to mature companies like PayPal and Square is perhaps a little unfair, as Banxa is much smaller and has, to some extent, more risk. That said, the current valuation factors in too much execution risk relative to the potential upside.

Banxa has the highest revenue growth but one of the lowest EV/S and EV/GTV multiples. It is also on a smaller revenue base, making high growth rates more sustainable, particularly as we observe Banxa's GTV being relatively small in nominal terms but also as a fraction of total cryptocurrency volumes.

Risk Factors

  1.  Cryptocurrency price risk

Whilst Banxa's volumes are driven by the volatility of cryptocurrencies, it is upside volatility which builds sustainable inflows. Banxa's indirect exposure to the price fluctuations of Bitcoin and Ethereum will always present potential short-term downside risk as cryptocurrencies are inherently volatile.

2. Execution risk

Banxa's management have performed well historically, delivering new clients and exceeding growth targets. However, there is no guarantee that this trend will continue. We think this risk is relatively low given the size of the addressable end-market, and the fact that the board and company management personally hold 25% of the outstanding float.

3. Product risk

There is a risk that larger clients may not rely on third-party service providers, such as Banxa, given they have scale. The more concentrated exchanges (end customers) become, the less they need Banxa's product because they can build in-house functionality. We see this as possible medium-term risk, but with additional exchanges in different jurisdictions appearing every other month, we think there is minimal short-term downside.

Summary

Banxa is set apart from direct "pick and shovels" competitors by its superior growth profile, broader expansion by jurisdiction, and more attractive valuation. VP Capital believes that the market has materially undervalued Banxa. It's not often that we come across a high growth company, within a high growth industry, trading at a price (C$3.95 at the time of publishing) which would entice value or GARP investors rather than traditional growth investors.

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    Thomas Lambeth
    Director and Portfolio Manager
    VP Capital

    Tom is a co-founder of VP Capital and brings over 10 years’ experience in the investment banking sector from Goldman Sachs, UBS and ANZ, where he worked on over A$10bn of transactions. Tom is currently a Portfolio Manager of VP Capital Fund I.

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