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eServGlobal — Core business update

eServGlobal — Core business update

Delays in closing contracts in the core business resulted in a revenue shortfall for eServGlobal in FY17, although some of these have now been signed and will contribute from FY18. Continued efforts to reduce the cost base should reduce the break-even revenue level to c €12.5m/A$19min FY18, which the company is aiming to achieve through focusing on additional sales to its existing customer base. eServGlobal participated in the recent HomeSend funding round, marginally increasing its stake to 35.7%.

Katherine Thompson

Written by

Katherine Thompson

Director

eServGlobal

Core business update

Trading update

Software & comp services

26 January 2018

Price

11.0p

Market cap

£100m

A$1.76:€1.14:£1

Net cash (A$m) at 31 October 2017

14.2

Shares in issue

906.9m

Free float

97%

Code

ESG

Primary exchange

AIM

Secondary exchange

ASX

Share price performance

%

1m

3m

12m

Abs

(2.2)

1.2

69.0

Rel (local)

(2.6)

(1.1)

57.0

52-week high/low

13.2p

4.9p

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 international remittances hub, alongside Mastercard and BICS.

Next events

FY17 results

End February 2018

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

Delays in closing contracts in the core business resulted in a revenue shortfall for eServGlobal in FY17, although some of these have now been signed and will contribute from FY18. Continued efforts to reduce the cost base should reduce the break-even revenue level to c €12.5m/A$19min FY18, which the company is aiming to achieve through focusing on additional sales to its existing customer base. eServGlobal participated in the recent HomeSend funding round, marginally increasing its stake to 35.7%.

Year end

Revenue (A$m)

EBITDA*
(A$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

10/15

25.9

(10.4)

(5.41)

0.0

N/A

N/A

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

12/17e**

12.2

(13.1)

(3.77)

0.0

N/A

N/A

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

Delayed contract signings hit FY17 revenues

eServGlobal expects to report FY17 (14 months to 31 December 2017) revenues of €8.3-8.5m/A$12.1-12.4m, below its guidance range of €9.7-11m. This was due to some of the contracts expected to sign in Q417 actually being signed in January. These contracts are worth €3m/A$4.6m over three years. The company is making progress in cutting its cost base: it expects to enter FY18 with an annualised cost base of €12.8m/A$19.6m and hopes to reduce this to €12-12.5m/A$18.4-19.1m through the course of the year.

Changes to forecasts

We have reflected the results for the 12 months to 31 October 2017 (12M17) as well as the trading update for FY17. We have reduced our revenue forecast for FY17 from A$15.2m to A$12.2m and increased our adjusted EBITDA loss forecast from A$7.6m to A$13.1m. We forecast a net cash position of A$9.7m at the end of FY17, which takes into account the €3.89m recently invested in HomeSend.

Valuation: Reflects HomeSend opportunity

Since the HomeSend update and the fund-raising in October, the share price has traded in the range of 10.25-13.15p. With funding concerns removed, we believe the market is now starting to factor the banking opportunity into the valuation of eServGlobal’s stake in HomeSend. Evidence of progress in the banking sector for HomeSend (new agreements as well as recently signed banks transitioning volumes to the platform) and pipeline conversion in the core business could support further upside to the share price. Conversely, weaker performance in the core business or slower execution for HomeSend could weigh on the share price.

Review of trading in 12M17 and FY17

The company has changed its year-end to 31 December and will report results for FY17 (the 14 months to 31 December 2017) by the end of February. In its trading update on 24 January, eServGlobal confirmed that revenue for FY17 came in below the guidance range of €9.7-11m and is likely to be in the range €8.3-8.5m. This implies that revenues in November and December 2017 totalled €0.9-1.1m. The company noted that the shortfall was due to delays in signing certain orders – agreements worth €3m in revenue were signed in January. The revenue on these contracts is expected to be recognised over three years. The company continues to focus on selling to its existing customer base, and has other active opportunities in the pipeline.

The company confirmed that, as planned, it had used some of the proceeds of the recent fund-raise to reduce the cost base further, achieving annualised cost savings of c €2m in H217. The company expects to enter FY18 with an adjusted like-for-like cost base of c €12.8m and hopes to reduce this to €12-12.5m by the end of FY18. As stated before, the company believes it can achieve revenues around this level through €2m in deferred revenue, €5m in recurring revenue and €5m from changes and upgrades from existing customers. If PLC and corporate costs are excluded, the cost base would reduce to €9.5-10.5m – on €12m revenues, this would imply EBITDA margins in the range of 12.5-20.8%.

Review of results for 12 months ended 31 October 2017

eServGlobal recently published results for the 12 months to 31 October 2017 (12M17). It reported 12M17 revenues of A$10.8m (H1: A$5.9m, H2: A$4.9m). The company wrote down A$3.7m of work-in-progress (H1: A$1.5m, H2: A$2.2m), which resulted in a negative gross margin for the period. Excluding the write-offs, the gross margin would have been 9.0%. Provisions totalling A$4.2m were taken against receivables (H1: A$2.8m, H2: A$1.4m). Stripping out these costs, as well as FX and other exceptional items, the company reported an EBITDA loss of A$11.7m. Administrative costs, pre-exceptionals and depreciation and amortisation have reduced from A$14.5m in FY16 to A$12.7m in 12M17.

After receiving the majority of the proceeds of the fund-raise in October, the company closed 12M17 with a net cash balance of A$14.2m. The remainder of the fund-raise (the retail portion – c A$5.4m) was received in November. Part of the proceeds of the fund-raise were targeted at further restructuring and we expect to see the administrative cost base reduce further.

Exhibit 1: Results highlights

A$'000

FY17e

FY17a

Difference

Y-o-y

Revenues

12,890

10,791

(16.3%)

(50.0%)

Gross profit

1,462

(2,718)

(285.9%)

(144.7%)

Gross margin

11.3%

-25.2%

(36.5%)

(53.4%)

Normalised EBITDA

(8,181)

(11,709)

43.1%

67.7%

Normalised EBITDA margin

(63.5%)

(108.5%)

(45.0%)

(76.1%)

Normalised EBIT

(11,571)

(15,391)

33.0%

(53.3%)

Normalised EBIT margin

(89.8%)

(142.6%)

(52.9%)

(96.1%)

Reported EBIT

(15,731)

(23,456)

49.1%

(149.7%)

Normalised PBT

(17,225)

(22,171)

28.7%

(26.4%)

Reported PBT

(21,385)

(30,236)

41.4%

(43.0%)

Normalised net income*

(13,980)

(22,617)

61.8%

(59.0%)

Reported net income*

(21,685)

(30,840)

42.2%

(40.6%)

Normalised EPS

(2.18)

(3.53)

61.8%

9.0%

Net debt/(cash)

(17,175)

(14,180)

(17.4%)

(694.8%)

Source: eServGlobal, Edison Investment Research. Note: *Net income after minorities.

Exhibit 2: Adjusted financials

A$m

FY16

12M17

y-o-y

Gross profit

6.09

(2.72)

(144.7%)

Gross margin

28.2%

(25.2%)

(53.4%)

Normalised gross profit

7.49

0.97

(87.1%)

Normalised gross margin

34.7%

9.0%

(25.7%)

Normalised EBITDA

(6.98)

(11.71)

40.4%

Normalised EBITDA margin

(32.4%)

(108.5%)

(76.1%)

Total costs excl D&A, FX & exceptionals

28.56

22.50

(21.2%)

Admin costs excl D&A, FX & exceptionals

14.47

12.68

(12.4%)

Source: eServGlobal, Edison Investment Research

Recent investment round for HomeSend

HomeSend had another funding round in December 2017. A total of €10m was invested: BICS decided not to participate in this round, Mastercard invested €6.11m and eServGlobal €3.89m. This has resulted in a change in joint venture ownership as follows: Mastercard from 55% to 56.09%, eServGlobal from 35% to 35.69% and BICS from 10% to 8.21%. Proceeds are expected to be used for working capital and to accelerate the development of additional functionality to meet the JV’s medium and long-term aims.

Outlook and changes to forecasts

Based on the 12M17 results and the FY17 trading update, we have revised our forecasts:

■

We have reduced our FY17 revenue forecast from A$15.2m to A$12.2m.

■

This reduces our underlying gross profit forecast from A$3.9m to A$1.5m and our reported gross margin forecast from A$2.4m to -A$2.2m.

■

We forecast an EBITDA loss of A$13.1m, which implies underlying operating costs of A$14.6m/€9.9m for FY17.

■

We have factored in the A$7.8m in WIP and accounts receivable write-downs.

■

Our net cash forecast now takes into account the €3.89m invested in HomeSend.

Exhibit 3: Changes to forecasts

A$'000

14 months to end CY17

Change

Old

New

Revenues

15,233

12,159

(20.2%)

Gross profit

2,400

(2,171)

(190.5%)

Gross margin

15.8%

(17.9%)

(33.6%)

Normalised gross profit

3,909

1,515

(61.2%)

Normalised gross margin

25.7%

12.5%

(13.2%)

Normalised EBITDA

(7,582)

(13,101)

72.8%

Normalised EBITDA margin

(49.8%)

(107.7%)

(58.0%)

Normalised EBIT

(11,537)

(17,397)

50.8%

Normalised EBIT margin

(75.7%)

(143.1%)

(67.3%)

Reported EBIT

(15,730)

(25,486)

62.0%

Normalised PBT

(17,846)

(25,031)

40.3%

Reported PBT

(22,040)

(33,119)

50.3%

Normalised net income*

(14,510)

(25,492)

75.7%

Reported net income*

(22,373)

(33,725)

50.7%

Normalised EPS

(2.15)

(3.77)

75.7%

Net debt/(cash)

(22,727)

(9,690)

(57.4%)

Source: Edison Investment Research. Note: *Net profit after minorities.


Exhibit 4: Financial summary

A$'000s

2012

2013

2014

2015

2016

2017

2017e*

Year end 31 October

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

28,070

31,003

31,261

25,866

21,577

10,791

12,159

Cost of Sales

(12,267)

(11,789)

(13,359)

(20,608)

(15,490)

(13,509)

(14,330)

Gross Profit

15,803

19,214

17,902

5,258

6,087

(2,718)

(2,171)

EBITDA

 

 

(1,936)

1,683

2,571

(10,449)

(6,982)

(11,709)

(13,101)

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

(7,277)

(660)

1,987

(12,469)

(10,039)

(15,391)

(17,397)

Amortisation of acquired intangibles

0

0

0

0

0

0

0

Exceptionals

(6,485)

5,997

28,735

(12,539)

(3,533)

(7,905)

(7,905)

Share-based payments

(624)

(456)

(438)

(54)

(75)

(160)

(184)

Operating Profit

(14,386)

4,881

30,284

(25,062)

(13,647)

(23,456)

(25,486)

Income from associate

0

0

(2,275)

(3,831)

(4,638)

(4,478)

(5,332)

Net Interest

(1,016)

(386)

(254)

(1,356)

(2,861)

(2,302)

(2,302)

Profit Before Tax (norm)

 

 

(8,293)

(1,046)

(542)

(17,656)

(17,538)

(22,171)

(25,031)

Profit Before Tax (FRS 3)

 

 

(15,402)

4,495

27,755

(30,249)

(21,146)

(30,236)

(33,119)

Tax

(187)

5,879

(13,515)

(2,125)

(596)

(592)

(592)

Profit After Tax (norm)

(5,805)

(732)

(379)

(14,125)

(14,030)

(22,605)

(25,478)

Profit After Tax (FRS3)

(15,589)

10,374

14,240

(32,374)

(21,742)

(30,828)

(33,711)

Average Number of Shares Outstanding (m)

196.8

241.1

253.1

264.0

366.6

640.2

676.4

EPS - normalised (c)

 

 

(3.01)

(0.36)

(0.20)

(5.41)

(3.88)

(3.53)

(3.77)

EPS - FRS 3 (c)

 

 

(7.98)

4.25

5.57

(12.33)

(5.98)

(4.82)

(4.99)

DPS (c)

0.00

0.00

0.00

0.00

0.00

0.00

0.00

Gross Margin (%)

56.3%

62.0%

57.3%

20.3%

28.2%

(25.2%)

(17.9%)

EBITDA Margin (%)

(6.9%)

5.4%

8.2%

(40.4%)

(32.4%)

(108.5%)

(107.7%)

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

(25.9%)

(2.1%)

6.4%

(48.2%)

(46.5%)

(142.6%)

(143.1%)

BALANCE SHEET

Fixed Assets

 

 

16,303

14,330

43,431

42,928

33,274

27,567

32,279

Intangible Assets

9,386

3,523

9,011

6,939

5,598

4,411

4,010

Tangible Assets

912

482

3

84

32

136

66

Other Fixed Assets

6,005

10,325

34,417

35,905

27,644

23,020

28,202

Current Assets

 

 

18,136

38,855

30,761

34,895

28,240

40,361

18,254

Stock

 

 

158

74

173

66

72

110

110

Debtors

 

 

14,094

21,846

26,811

24,403

17,976

6,870

8,328

Cash

 

 

3,794

4,909

3,679

4,976

9,375

33,255

9,690

Other

 

 

90

12,026

98

5,450

817

126

126

Current Liabilities

 

 

(12,934)

(15,082)

(18,033)

(25,520)

(14,469)

(11,812)

(12,312)

Creditors

(11,665)

(11,932)

(13,010)

(22,285)

(14,189)

(11,812)

(12,312)

Taxation & social security

(69)

(150)

(2,023)

(235)

(280)

0

0

Short term borrowings

(1,200)

(3,000)

(3,000)

(3,000)

0

0

0

Long Term Liabilities

 

 

(6,431)

(749)

(865)

(19,532)

(12,649)

(20,392)

(1,317)

Long term borrowings

(6,000)

0

0

(16,531)

(11,759)

(19,075)

0

Other long term liabilities

(431)

(749)

(865)

(3,001)

(890)

(1,317)

(1,317)

Net Assets

 

 

14,989

37,154

55,070

32,359

33,823

35,718

36,896

CASH FLOW

Operating Cash Flow

 

 

(11,901)

(7,207)

(5,810)

(12,130)

(10,712)

(9,492)

(13,273)

Net Interest

(974)

(580)

(271)

(423)

(175)

0

0

Tax

(7,813)

(1,088)

2,018

(3,148)

(1,159)

(719)

(839)

Capex

(1,966)

(1,950)

(6,403)

(2,921)

(1,583)

(2,351)

(2,743)

Acquisitions/disposals

23,307

0

5,418

0

5,133

0

0

Financing

(77)

16,140

3,964

4,365

15,929

32,007

31,810

Dividends

(111)

0

(146)

0

0

(579)

(579)

Net Cash Flow

465

5,315

(1,230)

(14,257)

7,433

18,866

14,376

Opening net debt/(cash)

 

 

3,871

3,406

(1,909)

(679)

14,555

2,384

2,384

HP finance leases initiated

0

0

0

0

48

0

0

Other

0

0

0

977

(4,690)

2,302

2,302

Closing net debt/(cash)

 

 

3,406

(1,909)

(679)

14,555

2,384

(14,180)

(9,690)

Source: eServGlobal, Edison Investment Research. Note: *14-month period ended 31 December 2017.

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
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. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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United Kingdom

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10017, New York

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Level 12, Office 1205

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NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

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10017, New York

US

Sydney +61 (0)2 8249 8342

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

SCISYS — Space division is flying in spite of Brexit

2017 was a transitional year for SCISYS, with the key Space division flying and ANNOVA’s integration progressing in line with expectations. The attainment of an €18m prime contractor role in H2 is a significant endorsement of SCISYS Space’s proprietary PLENITER software suite, with which SCISYS is targeting the commercial space sector. In August, ANNOVA achieved a key milestone with its BBC contract, which means it is trading ahead of initial management targets. This comes on the back of H1 results, which revealed 6% organic growth across the group and a record half-year order book. Management’s goal to achieve £60m in revenues and double-digit margins within three to five years looks conservative, and we believe the stock looks attractive on c 11x our maintained FY18e EPS.

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