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eServGlobal — Update 25 May 2016

eServGlobal — Update 25 May 2016

eServGlobal

Katherine Thompson

Written by

Katherine Thompson

Director

eServGlobal

FY16 guidance maintained

Trading update

Software & comp services

25 May 2016

Price

5p

Market cap

£13m

A$2.03:€1.31:£1

Net debt (A$m) at end FY15

14.6

Shares in issue

265.8m

Free float

94%

Code

ESG

Primary exchange

AIM

Secondary exchange

ASX

Share price performance

%

1m

3m

12m

Abs

(13)

42.9

(73.7)

Rel (local)

(12.2)

34.7

(70.6)

52-week high/low

19p

2p

Business description

eServGlobal develops mobile software solutions to support mobile financial services, with a focus on emerging markets. The company also has a share in the HomeSend international remittances hub, alongside MasterCard and BICS.

Next event

FY16 results

June 2016

Analysts

Katherine Thompson

+44 (0)20 3077 5730

Eric Opara

+44 (0)20 3681 2524

eServGlobal is a research client of Edison Investment Research Limited

Management has reiterated its target of breaking even at the EBITDA level for FY16. Two material contract wins confirmed that the anticipated recovery began towards the end of Q216, following a weak Q116. While this means that the company now expects to report an EBITDA loss in H116, the combination of cost-cutting and revenue recovery provides confidence that break-even can be achieved for the full year. We have revised our forecasts to reflect H116 performance, reducing our revenue and EBITDA forecasts but continuing to forecast a return to positive EBITDA in FY16.

Year end

Revenue (A$m)

PBT*
(A$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

10/14

31.3

(0.5)

(0.20)

0.0

N/A

N/A

10/15

25.9

(17.7)

(5.41)

0.0

N/A

N/A

10/16e

29.9

(10.6)

(3.23)

0.0

N/A

N/A

10/17e

32.0

(5.7)

(1.75)

0.0

N/A

N/A

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

H116 trading update confirms FY16 outlook

eServGlobal generated revenues of €5.5m (A$8.3m) in H116 and expects to report an EBITDA loss of €4.5-5m (A$6.8-7.6m). Sticking to its target of reaching EBITDA break-even for FY16 implies revenues of A$20.9-22.5m and EBITDA of at least A$6.8-7.6m in H216. With roughly one-third of H216 revenues contracted, this leaves c A$11.6m of new business to be signed from existing and new customers in H216. We have revised our forecasts to reflect the lower end of guidance, with a very small positive EBITDA in FY16 of A$0.1m rising to A$2m in FY17 (6.1% margin).

HomeSend making progress

HomeSend continues to open up new live corridors and could benefit from the launch of MasterCard Send in Russia, Ukraine and the Philippines. The joint venture continues to expect to break even in 2017 – we make no change to our forecasts for HomeSend’s contribution. The board of eServGlobal has reviewed the carrying value of its stake in HomeSend and believes no change is required – this will be reviewed again in September.

Valuation: Progress in core business key to upside

Based on eServGlobal’s current market cap of £13m and adjusting for cash receipts/payments relating to the JV and the third-party valuation of its stake in HomeSend, the implied value of the core business is £5m, equivalent to an EV/sales multiple of 0.3x for FY16e and FY17e. Recent contract wins are building confidence in the company’s ability to reach break-even, with further announcements crucial to confirm that break-even revenues can be achieved in FY16. Once consistent order flow is achieved and profitability resumed, the valuation should trend upwards. With the payment institution licence in place and the new datacentre in use, HomeSend is now positioned to grow transaction volumes and revenues, which should provide additional support to the share price.

H116 trading update

Core business update

Management confirmed that the company achieved revenues of €5.5m (A$8.3m) in H116 and expects to report an adjusted EBITDA loss in the range €4.5-5m (A$6.8-7.6m). We estimate that this implies a single-digit gross margin in the period, compared to -8.9% in H215 on revenues of A$13.0m. The company continues to target break-even revenues for FY16 of €19-20m (A$29.2-30.8m assuming an A$1.55:€1 rate in H216) and hence a small positive adjusted EBITDA for the year, helped by the substantial cost-cutting achieved to date. Having significantly improved cash collection (debtor days fell from 175 at the end of Q415 to 120 by the end of Q116), the company also expects to reach operating cash break-even on a monthly run rate basis in Q416.

The company previously said Q116 revenues were weak and recovery would begin in Q216. This recovery has in fact begun, albeit late in Q216, with an improved sales pipeline for H216. The company is now seeing more opportunities in Latin America, the Far East and other parts of Africa, which could diversify its geographical exposure. The company recently announced two material contract wins:

■

A five-year contract to supply PayMobile software, valued at €6m with €2.5m forecast to be recognised in FY16.

■

A contract win with a new customer in West Africa worth €1.6m, of which €1.1m will be recognised in FY16.

Including these contracts and recurring revenues, the company has contracted revenues of €12m for FY16. Of the €7.5m shortfall (to hit the mid-point of guidance), management expects at least half to made up by orders from existing customers leaving €3.75m of business to be signed with new customers.

HomeSend update

HomeSend has opened up more corridors, with 3,800 live in April compared to 3,110 in February, based on 200 sending and 36 receiving countries. HomeSend now supports MasterCard Send, MasterCard’s send-to-card remittance service. MasterCard Send is initially being launched in Russia, Ukraine and the Philippines, with roll-out to a wider range of countries over the next two and a half years. HomeSend has stated publicly that it expects to reach break-even in 2017. We make no change to our forecasts for HomeSend’s contribution.

In H116, eServGlobal received the final €3.5m that was sitting in escrow – this enabled the company to make the final contribution to the recent HomeSend capital raise, maintaining its share of the JV at 35%.

The board reviewed the carrying value of HomeSend in the period and left it unchanged compared to the September 2015 value. It will review the valuation again in September 2016. eServGlobal’s CTO, James Hume, recently joined the HomeSend board. James has been involved in the development of HomeSend since the outset.

Changes to forecasts

■

Revenues: we have reduced our FY16 forecast to reflect the mid-point of guidance and have reduced our FY17 accordingly, continuing to forecast 7% growth in FY17.

■

EBITDA: taking into account the loss generated in H116, we have reduced our EBITDA forecast for FY16 from A$1.1m to A$0.1m. We also reduced our FY17 forecast, from A$2.5m to A$2.0m.

■

Exceptional costs: loss-making contracts entered into in FY14 and FY15 have either been completed or provisioned against. The last bad debt provision of €900k was taken in H116, which we have now reflected in our forecasts.

■

Net interest: we have reflected the additional £1m loan advanced by Alpha Volantis (half on 23 March, half to be drawn imminently).

■

Net debt: we have increased our net debt forecast to reflect the reduced EBITDA forecasts and higher working capital.

Exhibit 1: Changes to forecasts

FY16e old

FY16e new

Change

FY17e old

FY17e new

Change

Revenues

31,007

29,898

-3.6%

33,136

32,027

-3.3%

Gross profit

15,493

14,451

-6.7%

17,648

16,265

-7.8%

Gross margin

50.0%

48.3%

-1.6%

53.3%

50.8%

-2.5%

Normalised EBITDA

1,093

51

-95.4%

2,498

1,965

-21.3%

Normalised EBITDA margin

3.5%

0.2%

-3.4%

7.5%

6.1%

-1.4%

Normalised EBIT

(1,317)

(3,049)

-131.6%

88

(1,435)

-1737.2%

Normalised EBIT margin

-4.2%

-10.2%

-6.0%

0.3%

-4.5%

-4.7%

Reported EBIT

(1,717)

(5,999)

-249.4%

(312)

(3,035)

871.6%

Normalised PBT

(8,757)

(10,553)

-20.5%

(3,912)

(5,661)

-44.7%

Reported PBT

(9,157)

(13,503)

-47.5%

(4,312)

(7,261)

-68.4%

Normalised net income

(7,136)

(8,572)

-20.1%

(3,260)

(4,659)

-42.9%

Reported net income

(7,456)

(10,932)

-46.6%

(3,580)

(5,939)

-65.9%

Normalised EPS

(2.68)

(3.23)

-20.1%

(1.23)

(1.75)

-42.9%

Net debt/(cash)

14,358

15,928

10.9%

13,459

16,582

23.2%

Source: Edison Investment Research


Exhibit 2: Financial summary

A$'000s

2011

2012

2013

2014

2015

2016e

2017e

Year end 31 October

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

7,017

28,070

31,003

31,261

25,866

29,898

32,027

Cost of Sales

(4,234)

(12,267)

(11,789)

(13,359)

(20,608)

(15,447)

(15,762)

Gross Profit

2,783

15,803

19,214

17,902

5,258

14,451

16,265

EBITDA

 

 

(6,694)

(1,936)

1,683

2,571

(10,449)

51

1,965

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

(8,601)

(7,277)

(660)

1,987

(12,469)

(3,049)

(1,435)

Amortisation of acquired intangibles

0

0

0

0

0

0

0

Exceptionals

0

(6,485)

5,997

28,735

(12,539)

(1,350)

0

Share-based payments

(261)

(624)

(456)

(438)

(54)

(1,600)

(1,600)

Operating Profit

(8,862)

(14,386)

4,881

30,284

(25,062)

(5,999)

(3,035)

Income from associate

0

0

0

(2,275)

(3,831)

(4,562)

(1,559)

Net Interest

164

(1,016)

(386)

(254)

(1,356)

(2,942)

(2,667)

Profit Before Tax (norm)

 

 

(8,437)

(8,293)

(1,046)

(542)

(17,656)

(10,553)

(5,661)

Profit Before Tax (FRS 3)

 

 

(8,698)

(15,402)

4,495

27,755

(30,249)

(13,503)

(7,261)

Tax

(560)

(187)

5,879

(13,515)

(2,125)

2,701

1,452

Profit After Tax (norm)

(8,997)

(5,805)

(732)

(379)

(14,125)

(8,442)

(4,529)

Profit After Tax (FRS3)

(9,258)

(15,589)

10,374

14,240

(32,374)

(10,802)

(5,809)

Average Number of Shares Outstanding (m)

196.8

196.8

241.1

253.1

264.0

265.8

265.8

EPS - normalised (c)

 

 

(4.59)

(3.01)

(0.36)

(0.20)

(5.41)

(3.23)

(1.75)

EPS - FRS 3 (c)

 

 

(4.73)

(7.98)

4.25

5.57

(12.33)

(4.11)

(2.23)

DPS (c)

0.00

0.00

0.00

0.00

0.00

0.00

0.00

Gross Margin (%)

39.7%

56.3%

62.0%

57.3%

20.3%

48.3%

50.8%

EBITDA Margin (%)

(95.4%)

(6.9%)

5.4%

8.2%

(40.4%)

0.2%

6.1%

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

(122.6%)

(25.9%)

(2.1%)

6.4%

(48.2%)

(10.2%)

(4.5%)

BALANCE SHEET

Fixed Assets

 

 

20,090

16,303

14,330

43,431

42,928

36,259

32,698

Intangible Assets

13,190

9,386

3,523

9,011

6,939

4,939

3,139

Tangible Assets

1,541

912

482

3

84

84

84

Other Fixed Assets

5,359

6,005

10,325

34,417

35,905

31,236

29,475

Current Assets

 

 

50,814

18,136

38,855

30,761

34,895

36,321

31,060

Stock

 

 

170

158

74

173

66

66

66

Debtors

 

 

40,425

14,094

21,846

26,811

24,403

26,212

28,078

Cash

 

 

10,129

3,794

4,909

3,679

4,976

9,937

2,810

Other

 

 

90

90

12,026

98

5,450

106

106

Current Liabilities

 

 

(40,856)

(12,934)

(15,082)

(18,033)

(25,520)

(37,385)

(39,900)

Creditors

(19,952)

(11,665)

(11,932)

(13,010)

(22,285)

(18,926)

(20,274)

Taxation & social security

(6,904)

(69)

(150)

(2,023)

(235)

(235)

(235)

Short term borrowings

(14,000)

(1,200)

(3,000)

(3,000)

(3,000)

(18,224)

(19,391)

Long Term Liabilities

 

 

(1,175)

(6,431)

(749)

(865)

(19,532)

(10,641)

(3,001)

Long term borrowings

0

(6,000)

0

0

(16,531)

(7,640)

0

Other long term liabilities

(1,175)

(431)

(749)

(865)

(3,001)

(3,001)

(3,001)

Net Assets

 

 

28,803

14,989

37,154

55,070

32,359

24,011

20,185

CASH FLOW

Operating Cash Flow

 

 

(8,060)

(11,901)

(7,207)

(5,810)

(12,130)

(1,058)

1,446

Net Interest

1,486

(974)

(580)

(271)

(423)

(200)

(200)

Tax

(448)

(7,813)

(1,088)

2,018

(3,148)

(300)

(300)

Capex

(529)

(1,966)

(1,950)

(6,403)

(2,921)

(1,100)

(1,600)

Acquisitions/disposals

0

23,307

0

5,418

0

5,344

0

Financing

(33,230)

(77)

16,140

3,964

4,365

(4,059)

0

Dividends

(23,910)

(111)

0

(146)

0

0

0

Net Cash Flow

(64,691)

465

5,315

(1,230)

(14,257)

(1,373)

(654)

Opening net debt/(cash)

 

 

(60,820)

3,871

3,406

(1,909)

(679)

14,555

15,928

HP finance leases initiated

0

0

0

0

0

0

0

Other

0

0

0

0

977

0

0

Closing net debt/(cash)

 

 

3,871

3,406

(1,909)

(679)

14,555

15,928

16,582

Source: eServGlobal, Edison Investment Research

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DISCLAIMER
Copyright 2016 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. 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