FairFX: a fair price for stellar growth

Enter FairFX (FFX), which “disintermediates” incumbent banks to offer low-cost multi-currency payments for individuals and businesses around the world. Its foreign exchange platform comprises prepaid currency cards, physical cash and wire payments between accounts. And, thanks to a judicious acquisition strategy, the group also recently entered the digital banking realm, with a focus on small and-medium-sized enterprise customers.

Last year was pivotal for FairFX. 'Turnover' – the gross value of transactions processed – rose 40.5 per cent to exceed £1.1bn, fee-based revenues soared 51.7 per cent to £15.5m, and the group reported its first full-year profit since joining the Alternative Investment Market (Aim) in 2014. This momentum accelerated in the first half of 2018, with turnover up a whopping 146 per cent to £1.1bn – even more impressive when one considers that strong margins were maintained, implying efficient scaling up. Yet, despite this progress, the shares still trade on a relatively modest multiple of forecast earnings. A re-rating could be imminent – especially if broker forecasts prove conservative, as we think may prove the case.

Excluding acquisitions, group turnover for the half-year to June 2018 still rose 22.8 per cent to £533m. Like-for-like turnover from prepaid cards and international payments rose 8.5 per cent to £182m and 39.1 per cent to £335m, respectively. On their own, these numbers are positive, but add in the extra volumes from City Forex – acquired in February for £6m – and international payments turnover soared 132 per cent year on year. The purchase of City Forex, which provides international payments and travel money, exemplifies FairFX’s broader strategy to in-source parts of its supply chain, to remove intermediaries and improve margins. It also brings opportunities to cross-sell FairFX’s products to City Forex customers – particularly FairFX’s corporate expenses card and platform.

The group’s burgeoning digital banking business was underpinned by two acquisitions in 2017. Last January, it bought Q-Money, gaining an e-money licence. In August, it purchased CardOne Banking – financed with a £26m placing at 58p – enabling it to provide retail and business bank accounts. FairFX can now also self-issue MasterCard branded cards, internalising another process to enhance economies of scale. And, in June, it launched ‘Fair Everywhere’, an international account for small businesses. More banking products should appear in the coming months.

True, payments and foreign exchange is a crowded space; made more so by the EU’s Second Payment Services Directive and the UK’s Open Banking initiative, encouraging challengers into the financial services market. But we think that FairFX’s diversified offering, turnover growth, loyal customer base and, vitally, profitability should work to its competitive advantage.