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eServGlobal — Break-even target reiterated

eServGlobal — Break-even target reiterated

eServGlobal’s H118 results confirm it has reduced its cost base further and is still targeting EBITDA break-even for FY18. It also noted it is having conversations with interested parties relating to the disposal of its core business. This would leave the company holding its 35.7% stake in the HomeSend joint venture, which we estimate makes up most of the current valuation.

Katherine Thompson

Written by

Katherine Thompson

Director

eServGlobal

Break-even target reiterated

H118 results

Software & comp services

12 September 2018

Price

7.45p

Market cap

£68m

A$1.8:€1.11:£1

Net cash (A$m) at end H118

2.9

Shares in issue

906.9m

Free float

97%

Code

ESG

Primary exchange

AIM

Secondary exchange

ASX

Share price performance

%

1m

3m

12m

Abs

1.0

(16.1)

10.4

Rel (local)

5.8

(10.9)

11.5

52-week high/low

13.2p

6.9p

Business description

eServGlobal develops mobile software solutions to support mobile financial services, with a focus on emerging markets. It also has a 35.7% share in the HomeSend cross-border payments hub, alongside Mastercard and BICS.

Next events

FY18 trading update

January 2019

Analysts

Katherine Thompson

+44 (0)20 3077 5730

Dan Ridsdale

+44 (0)20 3077 5729

eServGlobal is a research client of Edison Investment Research Limited

eServGlobal’s H118 results confirm it has reduced its cost base further and is still targeting EBITDA break-even for FY18. It also noted it is having conversations with interested parties relating to the disposal of its core business. This would leave the company holding its 35.7% stake in the HomeSend joint venture, which we estimate makes up most of the current valuation.

Year end

Revenue (A$m)

EBITDA*
(A$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

10/16

21.6

(7.0)

(3.88)

0.0

N/A

N/A

10/17

10.8

(11.7)

(3.53)

0.0

N/A

N/A

12/17**

12.2

(15.2)

(4.17)

0.0

N/A

N/A

12/18e

19.0

(0.3)

(1.04)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **14-month period.

Reduced cost base evident in H118 results

eServGlobal saw a small year-on-year decrease in revenues in H118 but, after a period of cost cutting and restructuring, it has materially reduced the EBITDA loss. The company received orders worth €7.7m/A$12.0m in H118, but only recognised €1.2m/A$1.9m in H118, providing a strong backlog going into H218. Management continues to target break-even at the EBITDA level for FY18 and has reduced its expectations for the total cost base for FY18 from €12–12.5m/A$19.0–19.8m to €11–11.5m/A$17.4–18.2m, with further cost reductions likely in FY19. We have made minor changes to our revenue and EBITDA forecasts for FY18. We reflect a higher working capital outflow for FY18 than previously forecast and expect net cash of A$2.5m at the end of FY18.

Potential interest in the core business

The company is having discussions about the core business with potentially interested parties. With the cost base substantially reduced, bad debt issues resolved or being resolved and a growing order book, the core business is now a more attractive proposition for a potential bidder. Excluding central/plc costs, the business could generate a c 20% EBITDA margin, which could make it attractive to a larger player or consolidator in this market. If the company does end up disposing of this business, this would leave a shell company holding the stake in the HomeSend joint venture.

Valuation: HomeSend the main driver

We believe that most of the company’s value is provided by its stake in the HomeSend joint venture. We estimate that in addition to the well-established use of HomeSend for remittance volumes, the share price is factoring in adoption of HomeSend by banking customers for cross-border payments. Evidence of recent bank signings transferring cross-border payments over to the HomeSend platform will be key to supporting and driving the current share price. Contract wins in the core business could also have a more limited impact on the share price.

Review of H118 results

Exhibit 1: Half-yearly results

A$m

H118

H117*

y-o-y

Revenues

5.58

5.86

(4.8%)

Gross profit

1.59

(1.35)

N/A

Gross margin

28.6%

-23.0%

51.6%

Normalised EBITDA

(1.38)

(5.92)

(76.6%)

Normalised EBITDA margin

(24.8%)

(101.0%)

76.2%

Net income

(7.69)

(14.39)

(46.6%)

Net debt/(cash)

(2.87)

10.60

N/A

Source: eServGlobal. Note: *Six-month period ended 30 April 2017.

eServGlobal reported performance for H118 in line with its recent trading update. H118 revenues were marginally lower than the comparative period a year ago (the year end recently changed to 31 December; H117 results relate to the six-month period ended 30 April 2017) but the loss at the normalised EBITDA level was much lower, reflecting the restructuring the company has undertaken. The company’s share of the HomeSend joint venture’s losses totalled A$2.6m in H118, compared to A$1.9m in H117. eServGlobal’s reported net loss also reduced substantially compared to a year ago.

Net cash at the end of H118 stood at A$2.9m, down from A$10.8m at the end of FY17. As well as the EBITDA loss of $1.4m, the company capitalised development costs of A$1.4m during H118. The remainder of cash was used for working capital purposes, including payments relating to restructuring that were previously provided for and fees related to preparations the company is making to sell the core business.

The company noted that there remains interest in the core business from potential acquirers and conversations are ongoing.

Outlook and changes to forecasts

Orders received in H118 totalled €7.7m/A$12.0m, of which only €1.2/A$1.9m was recognised as revenue in the half. This provides a good level of backlog going into H218. The company also noted a strong pipeline. It expects to reduce the total cost base (COGs and opex excluding depreciation, amortisation and exceptional items) to €11–11.5m/A$17.4–18.2m for FY18 and to reduce it further in FY19. This is down from previous guidance for FY18 of €12.0–12.5m. We have made minor changes to our income statement forecasts and reflect the higher working capital outflow for the year.

Exhibit 2: Changes to forecasts

A$'000

FY18e

FY18e

Change

Old

New

Revenues

19,000

18,978

-0.1%

Gross profit

6,591

6,149

-6.7%

Gross margin

34.7%

32.4%

-2.3%

Normalised gross profit

6,591

6,149

-6.7%

Normalised gross margin

34.7%

32.4%

-2.3%

Normalised EBITDA

(409)

(277)

-32.3%

Normalised EBITDA margin

(2.2%)

(1.5%)

0.7%

Normalised EBIT

(3,779)

(3,647)

-3.5%

Normalised EBIT margin

(19.9%)

(19.2%)

0.7%

Reported EBIT

(3,929)

(4,119)

4.8%

Normalised PBT

(7,241)

(8,088)

11.7%

Reported PBT

(7,391)

(8,560)

15.8%

Normalised net income

(7,637)

(9,420)

23.3%

Reported net income

(7,791)

(9,958)

27.8%

Normalised EPS

(0.84)

(1.04)

23.3%

Net debt/(cash)

(7,318)

(2,467)

-66.3%

Source: Edison Investment Research


Exhibit 3: Financial summary

A$'000s

2014

2015

2016

2017

2017*

2018e

Year end 31 October/31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

31,261

25,866

21,577

10,791

12,240

18,978

Cost of Sales

(13,359)

(20,608)

(15,490)

(13,509)

(16,729)

(12,829)

Gross Profit

17,902

5,258

6,087

(2,718)

(4,489)

6,149

EBITDA

 

 

2,571

(10,449)

(6,982)

(11,709)

(15,204)

(277)

Operating Profit (before amort acq intang, SBP and except.)

1,987

(12,469)

(10,039)

(15,391)

(19,959)

(3,647)

Amortisation of acquired intangibles

0

0

0

0

0

0

Exceptionals

28,735

(12,539)

(3,533)

(7,905)

(8,649)

(107)

Share-based payments

(438)

(54)

(75)

(160)

(297)

(365)

Operating Profit

30,284

(25,062)

(13,647)

(23,456)

(28,905)

(4,119)

Income from associate

(2,275)

(3,831)

(4,638)

(4,478)

(5,491)

(4,435)

Net Interest

(254)

(1,356)

(2,861)

(2,302)

(2,090)

(6)

Profit Before Tax (norm)

 

 

(542)

(17,656)

(17,538)

(22,171)

(27,540)

(8,088)

Profit Before Tax (FRS 3)

 

 

27,755

(30,249)

(21,146)

(30,236)

(36,486)

(8,560)

Tax

(13,515)

(2,125)

(596)

(592)

(681)

(1,198)

Profit After Tax (norm)

(379)

(14,125)

(14,030)

(22,605)

(28,054)

(9,220)

Profit After Tax (FRS3)

14,240

(32,374)

(21,742)

(30,828)

(37,167)

(9,758)

Average Number of Shares Outstanding (m)

253.1

264.0

366.6

640.2

676.4

906.9

EPS - normalised (c)

 

 

(0.20)

(5.41)

(3.88)

(3.53)

(4.17)

(1.04)

EPS - FRS 3 (c)

 

 

5.57

(12.33)

(5.98)

(4.82)

(5.51)

(1.10)

DPS (c)

0.00

0.00

0.00

0.00

0.00

0.00

Gross Margin (%)

57.3%

20.3%

28.2%

(25.2%)

(36.7%)

32.4%

EBITDA Margin (%)

8.2%

(40.4%)

(32.4%)

(108.5%)

(124.2%)

(1.5%)

Operating Margin (before am and except.) (%)

6.4%

(48.2%)

(46.5%)

(142.6%)

(163.1%)

(19.2%)

BALANCE SHEET

Fixed Assets

 

 

43,431

42,928

33,274

27,567

31,373

26,458

Intangible Assets

9,011

6,939

5,598

4,411

3,856

3,356

Tangible Assets

3

84

32

136

127

147

Other Fixed Assets

34,417

35,905

27,644

23,020

27,390

22,955

Current Assets

 

 

30,761

34,895

28,240

40,361

16,499

11,783

Stock

 

 

173

66

72

110

139

139

Debtors

 

 

26,811

24,403

17,976

6,870

4,181

7,799

Cash

 

 

3,679

4,976

9,375

33,255

10,801

2,467

Other

 

 

98

5,450

817

126

1,378

1,378

Current Liabilities

 

 

(18,033)

(25,520)

(14,469)

(11,812)

(10,810)

(10,053)

Creditors

(13,010)

(22,285)

(14,189)

(11,812)

(10,757)

(10,000)

Taxation & social security

(2,023)

(235)

(280)

0

(53)

(53)

Short term borrowings

(3,000)

(3,000)

0

0

0

0

Long Term Liabilities

 

 

(865)

(19,532)

(12,649)

(20,392)

(777)

(777)

Long term borrowings

0

(16,531)

(11,759)

(19,075)

0

0

Other long term liabilities

(865)

(3,001)

(890)

(1,317)

(777)

(777)

Net Assets

 

 

55,070

32,359

33,823

35,718

36,158

27,226

CASH FLOW

Operating Cash Flow

 

 

(5,810)

(12,130)

(10,712)

(9,492)

(12,630)

(4,652)

Net Interest

(271)

(423)

(175)

0

(2,735)

0

Tax

2,018

(3,148)

(1,159)

(719)

(132)

(650)

Capex

(6,403)

(2,921)

(1,583)

(2,351)

(2,821)

(2,890)

Acquisitions/disposals

5,418

0

5,133

0

0

0

Financing

3,964

4,365

15,929

32,007

32,286

0

Dividends

(146)

0

0

(579)

(581)

(142)

Net Cash Flow

(1,230)

(14,257)

7,433

18,866

13,387

(8,334)

Opening net debt/(cash)

 

 

(1,909)

(679)

14,555

2,384

2,384

(10,801)

HP finance leases initiated

0

0

48

0

0

0

Other

0

977

(4,690)

2,302

202

0

Closing net debt/(cash)

 

 

(679)

14,555

2,384

(14,180)

(10,801)

(2,467)

Source: eServGlobal, Edison Investment Research. Note: *14 month period ended 31 December

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Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by eServGlobal and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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Germany

London +44 (0)20 3077 5700

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United Kingdom

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10017, New York

US

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Research: Real Estate

GCP Student Living — Strong FY18 progress and positive outlook

GCP Student Living (DIGS) saw strong growth in FY18 rental income, driven by an increasing number of operational beds, continuing full occupancy and good levels of rental growth. Growing dividends should be fully covered once current development projects are completed and let. Capital values also grew, with investor interest in the asset class remaining strong, contributing to 11.5% NAV total return for the FY18 year. The company continues to find attractive investment opportunities, maintaining its selective approach to investment, both by location and asset quality, and is seeking to raise up £55m in a share pacing.

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