DigitalX : Research Note

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DIGITALX LIMITED

Research Note

A DIGITAL REVOLUTION

Investment Highlights.

• DigitalX Limited (DCC) is a software solutions company, providing exposure to the global digital payments industry through disruptive FinTech solutions in the remittance and value chain sectors. The Company has developed a suite of new and innovative software for institutions and consumers, leveraging Blockchain technology and the secure ledger system. The Company's most recent product, AirPocket, is designed to provide consumers with the ability to securely and cost-effectively send remittances in any currency, from anywhere, anytime, regardless of the transaction size. The Company's product, which is on track to go live in the June quarter of 2016, is capable of disrupting the multibillion dollar remittance industry. DCC thus has large blue sky potential and we initiate with a Speculative Buy recommendation.
• AirPocket the key for DCC: DCC has created the AirPocket application to disrupt the incumbents in the global remittance industry. The AirPocket adopts Blockchain technology to quickly and securely record an international money transfer and thus eliminates much of the issues currently associated with remittance. These issues include cost, transparency, timeliness and foreign exchange risks. DCC mobile first will focus on the Latin American remittance channel; given it is one of the largest in the world. The App is currently in Beta phase, with the Company recently expanding its beta testing up to 1000 users. DCC has completed development of the App and is ready to go live by June 2016
• Remittance market overview: A remittance most commonly refers to the funds an expatriate sends to their country of origin via wire, mail, or online transfer. In 2014, US$583b was transferred between countries, US$436b of which was received by developing countries. Latin American and Caribbean countries received a total of US$66.5b in remittances in the year 2007, more than both foreign direct aid and development aid. Three quarters of that money came from migrant labourers working inside the United States. Immigrant households in the United States budget 10% of their income towards remittances, which in turn make up between 50% and 80% of the household income of those receiving the money.
• Bitcoin and the Blockchain: Bitcoin is a cryptocurrency, as it relies on the principles of cryptography to validate transactions and govern the production of the currency itself. Each Bitcoin and each user is encrypted with a unique identity and recorded on a decentralized public ledger (Blockchain). The price of Bitcoin saw a large spike in late 2013 to early 2014, peaking at just under US$1,200 per Bitcoin before retreating to US$200. Interest in the Blockchain and Bitcoin has once again seen an increase in price; with the current spot price of Bitcoin being US$400. There has been a rapid increase in the number of Bitcoins transacted on a daily basis with around 200,000 Bitcoin transactions (US$800m) occurring daily and the trend continuing upward.

  16 February 2016

  12mth Rating SPEC BUY

  Price A$ 0.18

  RIC: DCC.AX BBG: DCC AU

  Shares o/s m 178.12

  Free Float % 64.3

  Market Cap. A$m 32.06

  Net Debt (Cash) A$m (3.0)

  Net Debt/Equity % NA

  3m Av. D. T'over A$m 0.07

  52wk High/Low A$ 0.29/0.07

  
  

  Analyst: Jon Scholtz

  Phone: (+61) 8 9225 2836

  Email: jscholtz@psl.com.au

  
  

  Disclosure: Patersons Securities Limited acted as lead manager to a Placement of $3.5m at $0.22 per share on 21 May 2015. Patersons was paid a fee for this service.

  
  

  An investment in this company should be considered speculative and note assumptions employed are contingent on broader market conditions remaining buoyant. These can change at short notice. Recommendations are current at the time of publication.

  
  

  12 Month Share Price Performance

• DigitalX Direct generating revenue: DigitalX Direct is a private platform specifically designed to provide real time liquidity to institutional investors and large commercial operators. DCC is providing liquidity of Bitcoin to the market for a 2-3% fee by leveraging its own stock of mined Bitcoin that has not been sold. DigitalX Direct generated cUS$11.0m in revenue in the December quarter, which saw it record a cashflow positive quarter. An increase in Bitcoin transactions is a positive catalyst for the platform.
• Balance Sheet in good stead: As at 31 December 2015, DCC had US$3.0m in cash and cash equivalents and no debt. The Company was also cash flow positive in the December Quarter, generating US$0.75m in free cash flow driven by improved Bitcoin prices and a significant increase in transaction volumes on the DigitalX Direct platform. We anticipate DCC to continue to be at least cash flow neutral in the upcoming quarters; however the launch of the AirPocket application may require a significant amount of capital for marketing and consumer education purposes which could see DCC returning to market.

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OVERVIEW

DigitalX Limited (DCC) is a software solutions company, providing exposure to the global digital payments industry through disruptive FinTech solutions in the remittance and value chain sectors. The Company has developed a suite of new and innovative software for institutions and consumers, leveraging Blockchain technology and the secure ledger system.

The Company's most recent product, AirPocket, is designed to provide consumers with the ability to securely and cost-effectively send remittances in any currency, from anywhere, anytime, regardless of the transaction size, as well, AirPocket provides domestic and international payment rails globally. AirPocket development is now complete and is on track to go live in Q2 2016.

DCC is based in Boston, MA and has offices in Red Bank, NJ and Perth, Australia.

AIRPOCKET

DCC has created the AirPocket application to disrupt the incumbents in the global remittance industry. The AirPocket adopts Blockchain technology to quickly and securely record an international money transfer and thus eliminates much of the issues currently associated with remittance. These issues include cost, transparency, timeliness and foreign exchange risks.

AirPocket leverages off a Peer to Peer (P2P) system which has been pioneered by major companies such as Uber and AirBnB, which eliminates the middle man and replaces it with technology which can match the demand of customers directly with the products and services of the suppliers.

In the instance of AirPocket, an individual who wishes to send cash will either locate an AirAgent and hand him cash or will download the App (with his bank account linked) and send directly. The sender will receive a secure Air code which he will then send to the recipient. The recipient will either receive the funds directly through his App or will locate an AirAgent and process the code to receive the cash.

Figure 1: AirPocket remittance process

Source: DigitalX Limited

The technology in the middle which records the transaction and facilitates the remittance is based on Blockchain technology. Each transaction is added to Blockchain and settled almost instantly. All transactions are thus also secure and regulatory compliant given the transparent and public nature of the Blockchain.

This is a similar process as going to traditional remittance companies, at a lower cost, such as Moneygram and Western Union which should allow for easy customer adoption by remittance users.

DCC will focus first on the Latin American remittance channel; given it is one of the largest in the world. The App is currently in Beta phase, with the Company recently expanding its beta testing to 1000 users. DCC has completed development of the App and is ready to go live in Q2 2016.

AirPocket has numerous advantages over current company's involved in global remittance largely due to the adoption of the P2P system and leveraging on the Blockchain technology. This reduces infrastructure cost with less corporate overhead and allows DCC to offer competitive fees. The Blockchain technology should also allow for easier compliance to regulation given the public nature of the ledger.

The main differentiator however is the instantaneous cash transfer capability with is due to the continuous settlement on the Blockchain, with a block being added and verified on average every 10 minutes.

Figure 2: AirPocket Competitive Advantages

Source: DigitalX Limited

Remittance

A remittance most commonly refers to the funds an expatriate sends to their country of origin via wire, mail, or online transfer. These peer to peer transfers of funds across borders are economically significant for many countries that receive them.

Since the year 2000, remittances have played an increasingly large role in the economies of small and developing countries. Since the late 1990s, remittances have exceeded development aid, and can often make up a full third of a country's GDP, for example, Nepal and Maldova. Remittance payments make up for a substantial amount of the flow of capital between countries. In 2014, US$583 billion was transferred between countries, US$436 Billion of which was received by developing countries.

Figure 3: Global Cross-Border Remittance Volume

Source: BI Intelligence

The countries receiving the largest share of remittances are the BRIC nations China and India. Those countries received US$69.97 and US$59.49 billion dollars in 2013 by 2015 estimates.

Remittances are seen as an important part of form of disaster relief, and exceed official development assistance (ODA). Those living in a country struck by a disaster benefit from receiving money via remittances, especially when the disaster is of a kind that has temporarily put people out of work and tied up money.

Remittances are also seen as a way to get those living in poorer countries to get bank accounts, in turn helping to promote economic development in a region.

Remittances play an important role in the growth of developing countries. In 2004, at the G8 summit held in Sea Island Georgia, member countries agreed to take on the problem of the relative high cost of moving funds across borders.

In 2008, the World Bank ended up establishing a database where people could compare prices of different transfer services, so as to make a more informed decision on how to transfer their funds back to their family and loved ones. The thinking behind the database was that, along with creating a more informed customer, it would encourage the money transfer industry to be more competitive on their pricing.

In 2009 the G8 set the goal of reducing the cost of remittances by 5% in as many years. The World Bank responded by helping to establish smaller regional databases using clear and objective methodology to measure the price of different transfer services.