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eServGlobal — Material progress for HomeSend

eServGlobal — Material progress for HomeSend

eServGlobal has been on a long journey to restructure its core business; we believe it is now nearing the end of this process. The cost base has been resized to match the revenue base case and the recent fund-raising has removed funding concerns. Its HomeSend joint venture has expanded its addressable market to serve the cross-border banking payments market, with joint venture partner Mastercard signing up 10 banks to use the service so far. This has the potential to add material revenues and grow the value of the joint venture.

Katherine Thompson

Written by

Katherine Thompson

Director

eServGlobal

Material progress for HomeSend

Trading update

Software & comp services

30 October 2017

Price

10.88p

Market cap

£95m

A$1.7:€1.13:£1

Net debt (A$m) at end H117

10.6

Shares in issue

869.2m

Free float

96%

Code

ESG

Primary exchange

AIM

Secondary exchange

ASX

Share price performance

%

1m

3m

12m

Abs

47.9

64.0

84.1

Rel (local)

44.0

62.4

69.1

52-week high/low

12.4p

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% share in the HomeSend international remittances hub, alongside Mastercard and BICS.

Next events

Results to 31 October

December 2017

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 has been on a long journey to restructure its core business; we believe it is now nearing the end of this process. The cost base has been resized to match the revenue base case and the recent fund-raising has removed funding concerns. Its HomeSend joint venture has expanded its addressable market to serve the cross-border banking payments market, with joint venture partner Mastercard signing up 10 banks to use the service so far. This has the potential to add material revenues and grow the value of the joint venture.

Year end

Revenue (A$m)

EBITDA*
(A$m)

EPS*
(A$)

DPS
(A$)

P/E
(x)

EV/EBITDA
(x)

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

10/17e

12.9

(8.2)

(2.18)

0.0

N/A

N/A

12/17e**

15.2

(7.6)

(2.16)

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 to 31 December 2017.

HomeSend – exploiting the banking opportunity

Mastercard has been actively marketing its Mastercard Send Cross-Border service (powered by HomeSend) to many of its banking customers, and so far 10 have signed up. As these banks shift their cross-border payments over to the service, eServGlobal estimates that annual transaction volumes could reach $3-5bn over the next few years, adding incremental revenues to HomeSend’s existing peer-to-peer, remittance-based revenues and accelerating the JV’s path to profitability.

Core business – adjusting the cost base

eServGlobal has revised down its revenue guidance for 2017, from €15-19m to €9.7-11m for the 14 months to December 2017 (FY17). It also noted that it should be EBITDA break-even for Q417. We have revised our forecasts for the 12 months to 31 October and FY17 to reflect the mid-range of lowered revenue guidance. This results in a cut to FY17 revenues of 32% and the EBITDA loss for widening by 59% from A$4.8m to A$7.6m. The company estimates that it has reduced the cost base such that EBITDA break-even should be achievable in FY18 at revenues of €12m/ A$18m. We have updated our forecasts to reflect the institutional placing of 229m shares (assumed net proceeds of A$33m) and will update for the retail offering when the outcome is known.

Valuation: Starting to reflect larger JV opportunity

Since the recent HomeSend update and the fundraising, the share price has gained 40% as we believe the market is now starting to factor the banking opportunity into the valuation of eServGlobal’s stake in HomeSend, and funding concerns have been removed. 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.

HomeSend update – growing the addressable market

On 2 October, the company released an update on the HomeSend joint venture. Mastercard has confirmed that it has signed up 10 banks for its Mastercard Send Cross-Border service, which is powered by HomeSend. We have already written about HomeSend’s experience with KEB Hana (Restructuring ongoing). Mastercard has since named Standard Chartered Bank and Atlas Mara as having signed up to the service.

The company estimates that annual transaction volumes from these agreements could reach $3-5bn in the next couple of years (ie average volume per bank of $300-500m per annum). We estimate that the HomeSend JV would charge commission of c 2.5% of the transaction value, retaining c 20% as gross margin. This would generate annual revenues of $75-125m and gross profit of $15-25m for the JV. This compares to HomeSend’s reported revenues of €4.2m/$4.6m and reported gross margin of €1.2m/$1.3m in CY16. To date, HomeSend has generated the majority of its revenues from cross-border, peer-to-peer remittances. Entry into the much larger cross-border banking payments market presents a significant opportunity for the joint venture to grow revenues; with a relatively fixed cost base, the joint venture has high operational leverage.

Core business update – still tough going

On 10 October, the company confirmed that revenues for the 14-month period to 31 December are likely to be lower than the range expected at H117 results in June. It now expects revenues of €9.7-11m, down from €15-19m. This implies a revenue range of €5.6-6.9m for the eight months to 31 December 2017, compared to the €4.1m reported in H117. It expects to receive orders worth €11-15m over the 14-month period, providing a growing backlog going into FY18. Management expects to achieve EBITDA break-even in the last quarter of CY17 and expects to be able to achieve EBITDA break-even at revenues of €12m in FY18.

The company has been working hard to reduce the cost base to reflect the revenue base case. The sales team has been reorganised, and the agent footprint reduced, with an increased focus on direct sales. Partners will still be used, but these are likely to be well-established multi-national organisations. To improve profitability, the business is promoting its software in a virtualised format, reducing the volume of low margin hardware sales.

The company believes that the €12m break-even revenue figure could be achieved from the existing customer base, from the combination of €2m in deferred revenues, €5m in recurring revenues (eg maintenance revenues, subscription licences) and a further €5m in changes and upgrades to licences. The enhanced focus on existing customers may result in a lower volume of new customer sales than the company has previously reported, but should result in higher quality and therefore more profitable orders.

The company is seeing a good level of interest in its mobile financial services recharge platform and expects this to be the main driver of new business in the coming year.

Fundraising removes cash concerns

On 20 October, eServGlobal announced a fundraising to raise gross proceeds of up to £24.0m. This is structured as two separate placings: institutional and retail.

The institutional placing consists of 228.979m shares at 9p/A$0.15 for gross proceeds of £20.6m. The price represents a 10% discount to the closing mid-market price on AIM of 10p as at 19 October. The shares have all been placed and were admitted to trading on AIM or the ASX today.

The retail placing consists of 37.688m shares also priced at 9p/A$0.15 for gross proceeds of £3.4m. The shares are offered in the ratio of one share per three held. Retail investors have until 10 November to decide whether to take up the offering. Those shares not taken up by retail investors will be offered to institutional shareholders, and we understand that these will all be taken up.

The company plans to use the proceeds as follows:

■

£11m to repay outstanding debt. We estimate that at the end of October, eServGlobal would have had gross debt of A$18.3m/£11m outstanding (including accrued interest), all owing to its largest shareholder, Lombard Odier. This was accruing interest at 1% per month.

■

£8.5m to fund the HomeSend JV. Management expects HomeSend to make a funding call to support short-term trading until the JV reaches profitability. In order to maintain its 35% stake, we expect eServGlobal to participate. The precise amount of the cash call is not known, but the company expects the £8.5m allocation to cover this plus any future funding requirements.

■

£2.5m to cover the final restructuring of the core business.

■

£2m working capital, including the payment of £1.2m transaction fees.

Changes to forecasts

We have revised our forecasts to reflect the middle of the lower revenue guidance range for 2017.

We have included the institutional fund-raising, and have allocated £1.03m of the £1.2m transaction fees to this tranche. We will update forecasts for the retail offering once the outcome is known.

We have not yet factored in the cash call for HomeSend as this has not been formally announced. Even if the full £8.5m/A$14.3m were required, this would still leave the company with a cash balance of A$2.8m as at the end of CY17 before the addition of likely net proceeds from the retail offering of £3.2m/A$5.4m.

Exhibit 1: Changes to forecasts

A$'000

12 months to end Oct 17

Change

y-o-y

14 months to end CY17

Change

Old

New

Old

New

Revenues

18,163

12,890

(29.0%)

(40.3%)

22,264

15,233

(31.6%)

Gross profit

5,081

2,971

(41.5%)

(51.2%)

6,721

3,909

(41.8%)

Gross margin

28.0%

23.1%

(4.9%)

(5.2%)

30.2%

25.7%

(4.5%)

Normalised EBITDA

(6,071)

(8,181)

34.7%

17.2%

(4,769)

(7,582)

59.0%

Normalised EBITDA margin

(33.4%)

(63.5%)

(30.0%)

(31.1%)

(21.4%)

(49.8%)

(28.3%)

Normalised EBIT

(9,461)

(11,571)

22.3%

(15.3%)

(8,724)

(11,537)

32.2%

Normalised EBIT margin

(52.1%)

(89.8%)

(37.7%)

(43.2%)

(39.2%)

(75.7%)

(36.5%)

Reported EBIT

(13,621)

(15,731)

15.5%

(67.5%)

(12,918)

(15,730)

21.8%

Normalised PBT

(15,830)

(17,225)

8.8%

1.8%

(16,334)

(17,846)

9.3%

Reported PBT

(19,990)

(21,385)

7.0%

(1.1%)

(20,528)

(22,040)

7.4%

Normalised net income

(12,864)

(13,980)

8.7%

1.7%

(13,301)

(14,510)

9.1%

Reported net income

(20,290)

(21,685)

6.9%

1.2%

(20,861)

(22,373)

7.2%

Normalised EPS

(2.01)

(2.18)

8.7%

43.7%

(2.08)

(2.16)

3.8%

Net debt/(cash)

9,912

(17,175)

(273.3%)

(820.4%)

9,542

(17,074)

(278.9%)

Source: Edison Investment Research


Exhibit 2: Financial summary

A$'000s

2012

2013

2014

2015

2016

2017e

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

12,890

15,233

Cost of Sales

(12,267)

(11,789)

(13,359)

(20,608)

(15,490)

(9,918)

(11,325)

Gross Profit

15,803

19,214

17,902

5,258

6,087

2,971

3,909

EBITDA

 

 

(1,936)

1,683

2,571

(10,449)

(6,982)

(8,181)

(7,582)

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

(7,277)

(660)

1,987

(12,469)

(10,039)

(11,571)

(11,537)

Amortisation of acquired intangibles

0

0

0

0

0

0

0

Exceptionals

(6,485)

5,997

28,735

(12,539)

(3,533)

(3,971)

(3,971)

Share-based payments

(624)

(456)

(438)

(54)

(75)

(189)

(222)

Operating Profit

(14,386)

4,881

30,284

(25,062)

(13,647)

(15,731)

(15,730)

Income from associate

0

0

(2,275)

(3,831)

(4,638)

(3,883)

(4,538)

Net Interest

(1,016)

(386)

(254)

(1,356)

(2,861)

(1,772)

(1,772)

Profit Before Tax (norm)

 

 

(8,293)

(1,046)

(542)

(17,656)

(17,538)

(17,225)

(17,846)

Profit Before Tax (FRS 3)

 

 

(15,402)

4,495

27,755

(30,249)

(21,146)

(21,385)

(22,040)

Tax

(187)

5,879

(13,515)

(2,125)

(596)

(100)

(100)

Profit After Tax (norm)

(5,805)

(732)

(379)

(14,125)

(14,030)

(13,780)

(14,277)

Profit After Tax (FRS3)

(15,589)

10,374

14,240

(32,374)

(21,742)

(21,485)

(22,140)

Average Number of Shares Outstanding (m)

196.8

241.1

253.1

264.0

366.6

640.2

672.9

EPS - normalised (c)

 

 

(3.01)

(0.36)

(0.20)

(5.41)

(3.88)

(2.18)

(2.16)

EPS - FRS 3 (c)

 

 

(7.98)

4.25

5.57

(12.33)

(5.98)

(3.39)

(3.32)

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%

23.1%

25.7%

EBITDA Margin (%)

(6.9%)

5.4%

8.2%

(40.4%)

(32.4%)

(63.5%)

(49.8%)

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

(25.9%)

(2.1%)

6.4%

(48.2%)

(46.5%)

(89.8%)

(75.7%)

BALANCE SHEET

Fixed Assets

 

 

16,303

14,330

43,431

42,928

33,274

27,590

26,635

Intangible Assets

9,386

3,523

9,011

6,939

5,598

3,797

3,497

Tangible Assets

912

482

3

84

32

32

32

Other Fixed Assets

6,005

10,325

34,417

35,905

27,644

23,761

23,106

Current Assets

 

 

18,136

38,855

30,761

34,895

28,240

28,658

30,483

Stock

 

 

158

74

173

66

72

72

72

Debtors

 

 

14,094

21,846

26,811

24,403

17,976

10,594

12,521

Cash

 

 

3,794

4,909

3,679

4,976

9,375

17,175

17,074

Other

 

 

90

12,026

98

5,450

817

817

817

Current Liabilities

 

 

(12,934)

(15,082)

(18,033)

(25,520)

(14,469)

(8,256)

(9,797)

Creditors

(11,665)

(11,932)

(13,010)

(22,285)

(14,189)

(7,976)

(9,517)

Taxation & social security

(69)

(150)

(2,023)

(235)

(280)

(280)

(280)

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)

(890)

(890)

Long term borrowings

(6,000)

0

0

(16,531)

(11,759)

0

0

Other long term liabilities

(431)

(749)

(865)

(3,001)

(890)

(890)

(890)

Net Assets

 

 

14,989

37,154

55,070

32,359

33,823

46,750

46,045

CASH FLOW

Operating Cash Flow

 

 

(11,901)

(7,207)

(5,810)

(12,130)

(10,712)

(10,983)

(10,769)

Net Interest

(974)

(580)

(271)

(423)

(175)

(148)

(148)

Tax

(7,813)

(1,088)

2,018

(3,148)

(1,159)

(300)

(350)

Capex

(1,966)

(1,950)

(6,403)

(2,921)

(1,583)

(1,590)

(1,855)

Acquisitions/disposals

23,307

0

5,418

0

5,133

0

0

Financing

(77)

16,140

3,964

4,365

15,929

33,001

33,001

Dividends

(111)

0

(146)

0

0

(421)

(421)

Net Cash Flow

465

5,315

(1,230)

(14,257)

7,433

19,559

19,458

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)

0

0

Closing net debt/(cash)

 

 

3,406

(1,909)

(679)

14,555

2,384

(17,175)

(17,074)

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

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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 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. 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). 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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

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Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

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10017, New York

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Level 12, Office 1205

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NSW 2000, Australia

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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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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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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

Research: TMT

Mynaric — Fibreless optical links in the skies

Mynaric has developed equipment for transmitting data via laser between moving airborne or space platforms at rates similar to conventional optical fibre, but with the light transmitted through free space rather than along a cable. This opens the possibility of equipping the airborne networks proposed by Facebook and Google, or the satellite networks supported by Elon Musk and Richard Branson with high speed optical data links rather than slower microwave connections. These proposed networks offer the opportunity of providing more data transmission in the developed world without needing to install more fibre-optic cable and extending internet access to the half of the world’s population who are not connected.

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