Banking on HomeSend

eServGlobal 22 May 2018 Outlook
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eServGlobal

Banking on HomeSend

14-month results

Software & comp services

22 May 2018

Price

9.62p

Market cap

£87m

A$1.8:€1.14:£1

Net cash (A$m) at 31 December 2017

10.8

Shares in issue

906.85m

Free float

97%

Code

ESG

Primary exchange

AIM

Secondary exchange

ASX

Share price performance

%

1m

3m

12m

Abs

4.1

(0.8)

81.5

Rel (local)

(2.0)

(7.8)

71.9

52-week high/low

13.2p

5.3p

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

AGM

17 May 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

eServGlobal enters FY18 with a reduced cost base and a fully funded balance sheet; we are forecasting the core business to be close to EBITDA break-even in FY18. With access to Mastercard’s sales force and financial institution customer base, HomeSend has signed up a number of banks to use its cross-border payment platform. As these banks shift volumes onto the platform, this should drive strong growth in volumes and move the joint venture towards profitability.

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

(0.4)

(0.84)

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.

FY17 results – core business rightsized

FY17 was another year of restructuring within the core business, with poorly performing legacy contracts cleared out and the cost base reducing to a level that the company believes it can support with revenues from its existing customer base. Contracts worth €5m that the company was aiming to sign by the end of FY17 have been signed post year-end, providing support to the company’s target to reach break-even revenues of c €12.5m/A$19.4m in FY18. At this revenue level and excluding corporate costs, the core business should be able to generate EBITDA margins in the region of 20%, which could make this business a strategic target for a larger mobile software supplier.

Banking opportunity main focus for HomeSend

HomeSend’s initial volumes were from remittances companies, and it continues to support these customers. However, more recently Mastercard has been marketing the HomeSend service to its banking customers for cross-border payments, a much larger addressable market, and has signed up more than 20 banks to date, including one of the largest global financial institutions. Mastercard represents a major sales channel for HomeSend, as HomeSend makes up a crucial part of Mastercard’s strategy to generate revenues from a much wider range of services within the payments market, hence

Valuation: HomeSend the main driver

We believe that the majority of the value of the company is provided by its stake in the HomeSend joint venture. We estimate that the share price is factoring in adoption of HomeSend by banking customers to the tune of c $5bn in transaction volumes, a small proportion of the cross-border payments market. 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.

Investment summary

Supporting mobile money & cross-border payments

eServGlobal’s core business sells software to mobile network operators and financial service providers to manage prepaid subscriber top-ups and mobile money wallets, with a focus on developing markets. Growth drivers include the shift to using the mobile phone for financial services, the increasing popularity of mobile peer-to-peer payments, increasing penetration of the existing customer base across additional geographies and the development of channel partners. eServGlobal has also jointly developed a hub for cross-border payments, which operates through its 35.7% stake in the HomeSend joint venture.

Financials: Entering FY18 with reduced cost base

FY17 revenues were in line with our forecast, reflecting the delay in signing contracts that were expected towards the end of the period. Since year-end, the company has signed €5m worth of these contracts. FY17 gross loss and operating loss reflected the lower revenues and one-off charges relating to the write-down of WIP and receivables. Entering FY18, the company has a much-reduced cost base, and estimates that to reach EBITDA break-even, it requires revenues of €12.8m/A$19.8m. Management hopes to reduce this to €12.0-12.5m/A$18.6-19.4m over the course of the year. The company used funds raised in October to pay down all remaining debt and invest in HomeSend, closing FY17 with a net cash position of A$10.8m. We introduce FY18 forecasts for revenues close to the break-even level and we assume that the joint venture continues to be loss-making in FY18, only reaching break-even in FY19.

Valuation: Banking adoption of HomeSend key to share price upside

We believe that the majority of the value of the company is provided by its stake in the HomeSend joint venture (c 86% of current share price). We estimate that the share price is factoring in adoption of HomeSend by banking customers to the tune of c $5bn in transaction volumes, a small proportion of the cross-border payments market. 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.

Sensitivities: Demand, competition, joint venture

Our forecasts and the share price are sensitive to the following factors. Demand: the timing and size of contracts in the core business are difficult to predict. Competition: eServGlobal’s core business competes with other specialist mobile money software providers, as well as with larger mobile telecom-focused companies with wider service offerings. HomeSend JV: eServGlobal has limited control over the JV. The JV’s ability to reach profitability will depend on adoption of the HomeSend platform by banks and money transfer organisations, the timing of which is uncertain. eServGlobal may need to inject additional funds into the JV. Economic and political risk: the company’s historic focus on developing countries has exposed it to the risk of political or economic upheaval in those countries; a growing pipeline in a much wider spread of geographies should start to diversify this risk. Currency: eServGlobal’s functional currency is the euro, while it reports in Australian dollars, leading to sometimes material translational currency gains or losses. In addition, as it has employees in several countries, there is some mismatch between revenues and operating costs.

Company description: Mobile financial services

eServGlobal is a software provider specialising in mobile money solutions for mobile network operators and financial service providers. Customers tend to be in developing markets: in FY16, 92% of revenues were generated from the Middle East and Africa. eServGlobal has also developed a hub for cross-border payments, which operates through its stake in the HomeSend joint venture. After a period of restructuring, the company is focused on reaching break-even in its core software business and supporting the growth of the HomeSend JV.

Company background

eServGlobal was founded in 1983 and has operated several different telecom-related technology businesses. The company currently consists of two businesses: software for mobile money and recharge services and a cross-border payments service (HomeSend). In 2013, eServGlobal created a joint venture with MasterCard and BICS for the HomeSend service, of which it now owns 35.7%. eServGlobal listed on the ASX in 2000 and AIM in 2004.

The company is currently led by Executive Chairman John Conoley, who was previously the CEO of Psion (where he restructured the business before its sale to Motorola). John joined the board as a non-executive director in 2013 and took on the executive chairman role in 2015. Andrew Hayward joined as CFO in 2016. James Hume, CTO for many years, assumed the COO role in 2016.

Core business: Mobile top-up software

The core business of eServGlobal develops, sells and installs software to manage money on a mobile phone. The software is based on eServGlobal’s PayMobile platform; the latest version (4.0) was launched recently and provides a modular approach that allows customers to add features and services as subscriber demand allows.

Customers are typically mobile network operators (MNOs); the nature of eServGlobal’s products means the customer focus is more towards developing countries where subscribers tend to prepay rather than use post-pay contracts. The PayMobile platform offers:

Recharge solutions: voucher management solutions (VMS) and electronic voucher distribution (EVD) for prepaid subscribers.

Mobile Money: this supports the conversion of cash to electronic value and conversion back to cash, ie a mobile wallet.

eServGlobal’s PayMobile platform recharge solutions offer voucher creation, distribution in an agent network, sales and fulfilment (physical or electronic), a reporting service and a promotions engine. Roughly 80% of revenues are generated from Recharge (VMS and EVD). eServGlobal’s Mobile Money software enables MNOs to provide their subscribers with a mobile wallet to support domestic money transfers. As well as supporting peer-to-peer payments, the software can be used for bill payments (eg paying for water or electricity in advance without having to travel to a utility’s office), G2P (government disbursements such as salaries, pensions or benefits), aid payments and P2G (payments to the government for things like tax). The company is looking to upgrade existing Recharge customers to its Mobile Money solution, as well as targeting new customers with the solution. For more background on the prepaid and mobile money markets see On the front foot (September 2016).

Customer base – developing markets

eServGlobal’s customers are based in the Middle East, Africa and Asia-Pacific. In the table below, we show some of the customers that have been publicly announced (this list is not comprehensive). We have calculated the total numbers of subscribers served by these customers at the group level and identified, where possible, in which countries those customers have live services supported by eServGlobal. Even in the countries where services are live, operators do not always have licences covering their entire subscriber base and this is an area for potential licence extensions as subscriber adoption of services grows.

Exhibit 1: Selected eServGlobal customers

Customer

Countries of operation

Total subs
(m)

Countries with live eServGlobal services

Est subs
covered (m)

du

UAE

9.0

UAE

9.0

Ooredoo

Qatar, Kuwait, Algeria, Tunisia, Myanmar, Maldives, Iraq, Oman, Palestine, Indonesia, Singapore, Laos

150.0

Algeria, Tunisia, Iraq, Indonesia (Indosat)

132.0

Zain

Bahrain, Iraq, Jordan, Kuwait, Lebanon, Morocco, Saudi Arabia, South Sudan, Sudan

45.3

Iraq, Jordan, Kuwait, Saudi Arabia

28.7

Total

204.3

169.7

Source: eServGlobal, company reports, Edison Investment Research

Competition

The core business competes with a variety of mobile billing software providers, most frequently with the companies in Exhibit 2.

Exhibit 2: Competitive environment

Company

Ownership

Recharge (R)/ Mobile money (M)

Comments

Ericsson

R

Sells recharge as part of converged billing solutions

Huawei

R

Sells recharge as part of converged billing solutions

Mahindra Comviva

Tech Mahindra

R, M

Customers include Ethio Telecom, Vodafone Egypt. Claims 10% of the world's recharge is done using Comviva's PreTUPS software.

Telepin Software

Constellation Software

R, M

Canada-based; active in the Middle East, Africa and the Americas. More than 40 active deployments covering >132m subs and >1m merchants. Customers include Cable & Wireless Panama, Singtel Mobile (Singapore), Etisalat Afghanistan, Millicom (DRC, Rwanda, Tanzania). Bought by Volaris Group, a subsidiary of Constellation Software (TSX-listed), in 2017.

Utiba

Amdocs

R, M

Singapore-based. Customers include Digicel (Haiti), BSNL (India), True Corp (Thailand). Deployments in 36 countries covering 660m subs and >6m agents.

Source: Edison Investment Research

Strategic focus – build recurring revenue base

The company has been through a long restructuring process in order to improve the efficiency of its sales process, to focus on profitable customers and to shift the structure of contracts to include more recurring elements. This has entailed, amongst other things, a reduction in headcount across several functions, the clean-up of various contracts where work-in-progress exceeded the amount that could be recovered, and provisions against several doubtful debts. 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 – the company recently launched a channel partner programme. To improve profitability, the business is promoting its software in a virtualised format, reducing the volume of low margin hardware sales.

More recently, recharge contracts with analytics functionality have been signed on a multi-year basis, which increases the level of recurring revenues and hence visibility. In addition to maximising the opportunity available from its existing customer base, the company is working to widen its geographic reach, in particular in Asia Pacific.

Management has focused on reducing the cost base to more accurately match the base level of revenues it believes can be generated from its existing customer base. Clean1 administrative costs fell from A$21.8m in FY15 to A$12.8m in the 12 months to October 2017 and A$14.5m for FY17 (14 months ended 31 December 2017). The company is targeting an EBITDA break-even revenue level of €12m/A$18.6m in FY18. It believes that this level of revenues could be achieved from the existing customer base, for example, as €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.

Excludes exceptional items, FX gains/losses, depreciation & amortisation, and share-based payments.

The company has noted that central/PLC costs are in the region of €2.4m/A$3.7m per annum. Excluding these costs, at €12m/A$18.6m in revenues, the core business could generate an EBITDA margin of 20%. This highlights that the business could be of interest to a larger player or consolidator in this market who may be attracted by the strong relationship the business has with a number of Middle Eastern MNO customers.

HomeSend JV

eServGlobal has a 35.69% stake in the HomeSend JV (the other partners are Mastercard with 56.09% and BICS with 8.21%). HomeSend is a cross-border payments platform. For the history of how the JV was created see Supporting mobile money in the developing world (August 2015).

Supporting cross-border payments

HomeSend’s platform aims to reduce the cost and speed up the process of sending money internationally. Its main focus is on supporting banks to make cross-border payments, a market that generates transaction volumes worth many trillions of dollars a year. HomeSend has proven the efficacy of its platform in the international remittances market and is now working, in many cases via Mastercard, with banking customers to help them transfer cross-border payment transactions onto the platform. Other applications that could make use of the platform include e-commerce cross-border transactions and disbursements eg ride hailing services with administration hubs in a few countries paying drivers in other countries or online retailers with merchants and consumers in different countries.

Banking – the killer app

Typically, a bank will not have direct relationships with all recipient banks in other countries. Instead, it maintains a series of correspondent banking relationships ie banks that sit between the sending and recipient banks which use local knowledge to transfer funds. Each bank in the process adds processing time and fees, making cross-border payments more costly than domestic payments, as well as slower and more error-prone. Use of the HomeSend platform means that banks can bypass their correspondent banking relationships, reducing the cost and increasing the efficiency of the process.

The HomeSend hub – how it works

The HomeSend hub connects the payment systems of the different hub members and processes the individual end-user transactions. It also acts as a clearing house that manages the multilateral settlement with the connected service providers. Members of the hub can get access to all other members through a single connection and commercial relationship.

HomeSend has technical integrations with a large number of MNOs and sending organisations (banks, MTOs2, post offices, payment processors, etc). To join the HomeSend hub, a company needs to technically integrate into the platform and then enter into commercial agreements with its opposite numbers in the corridors in which it wants to operate. This is a more efficient method than creating a commercial agreement with each necessary party and then creating the technical connections for each corridor. Customers can send and receive money via HomeSend using cash, mobile wallets, debit/credit cards or direct bank transfers, as well as traditional pick-up methods. The transfer is done in near real-time compared to hours or days for traditional remittance methods. In addition, senders and receivers have full transparency over the cost of the transaction and the amount that will be received. The hub has send/receive capabilities in 100 countries.

MTO: money transfer organisation

Remittances were the first application for HomeSend

The first companies to sign up to use HomeSend were MTOs, we believe to supplement their existing remittance networks. This enables them to access countries where they do not have an existing agent network or to make use of mobile wallet capabilities, in order to expand their networks at much lower incremental cost. In other cases, sending organisations use HomeSend for lowest cost routing. We understand that the vast majority of revenues generated by HomeSend to date have been from remittances. Notable MTOs using HomeSend include, MoneyGram (the world’s second largest MTO), WorldRemit and Azimo. To appreciate the size of the addressable market, according to the World Bank, global remittances totalled $574bn in 2016. For further information on the international remittances market see On the front foot (September 2016).

Banks signing up & going live

HomeSend and Mastercard identified that the HomeSend hub could support banks making cross-border payments, a market that is multiple times larger than the international remittance market. The company estimates that this amounts to an addressable market of $22 trillion in payment volumes. Entry into this market presents a significant opportunity for the joint venture to grow revenues; with a relatively fixed cost base, growth in volumes processed from this market would have a significant positive impact on the profitability of the joint venture.

HomeSend a key building block in Mastercard’s growth strategy

Mastercard announced in 2015 that its Mastercard Send service would use HomeSend for international payments and remittances. Through a single connection to the Mastercard Send platform, businesses, merchants, issuers, governments, non-profits and other senders can send money to consumers and businesses whether they are banked or unbanked, and located domestically or abroad. Senders or recipients do not need to be Mastercard cardholders.

In a recent analyst presentation, Mastercard demonstrated how important HomeSend is to its cross-border transaction capabilities (see Exhibit 3). Mastercard’s traditional card business addresses the $45 trillion personal consumption expenditure market, of which card payments make up nearly half. In recent years Mastercard has invested in expanding the services it can offer in addition to debit and credit card payments and has identified a further $180 trillion in payments volumes that it could address. These are in the business-to-business (B2B), peer-to-peer (P2P), and business-to-consumer (B2C) markets, and the company intends to support them via its recent Vocalink acquisition (for faster payments) and Mastercard Send, as well as with the existing cards business.

After Q118 results published in May, Mastercard’s CEO discussed the B2B hub, which includes HomeSend. He said “The idea there is to streamline accounts payable which otherwise has over the years become more and more of a nightmare to most people. There's lots of people you're buying from, lots of people you're paying to. Trying to reconcile those two together and find a way to ensure that complicated payments are reconciled appropriately and don't leave you with enormous issues at the end of the cycle as well as providing access to easy credit. That kind of stuff is what the Mastercard B2B Hub can help with..… I'm talking about capturing cross-border B2B payments. That's where Mastercard Send and HomeSend on the one hand combined with Vocalink on the other is to me the killer app”.

Exhibit 3: HomeSend in context for Mastercard

Source: Mastercard (from Investment Community Meeting, 7 September 2017)

Mastercard support is a key competitive advantage

Mastercard has well-established relationships with a large number of financial institutions globally, with relationships in 210 countries and territories. As suggested by the company’s plans to expand the services it can offer, its salesforce is motivated to suggest solutions to its customer base that go further than traditional card processing. This gives HomeSend a substantial channel to market as well as providing a level of comfort to banking customers that know and trust Mastercard’s capabilities.

Mastercard signing banks up at pace

October 2017: Mastercard confirmed that it had signed up 10 banks for the Mastercard Send Cross-Border service, which is powered by HomeSend, including Standard Chartered Bank and Atlas Mara. HomeSend also directly signed up KEB Hana (see more detail here: Restructuring ongoing). 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).

December 2017: eServGlobal confirmed that another five smaller banks had signed up to use the service, with average volumes in the range of $30-50m per annum.

February 2018: the company confirmed that the total number of banks signed up exceeded 20 and that two very large contracts were in the later stages of discussion.

March 2018: HomeSend confirmed that one of the two contracts above had been signed – this is with one of the world’s largest global financial institutions.

HomeSend is now focused on helping customers to go live and transition payment transactions onto the platform. To encourage this, it has invested in support to on-board customers and optimise their use of the platform.

Competitive environment

There is a limited amount of direct competition for HomeSend. Earthport has developed a hub and spoke model for cross-border payments and has signed up several banks to use its platform, including Bank of America. In its most recent results, it reported that in the six months to 31 December 2017, it processed transactions worth $8.7bn (+12% y-o-y) to generate revenues of £15.4m (+8% y-o-y). In our view, the main challenge to uptake is the inertia of banks to change from their existing cross-border arrangements.

There has been much discussion about the use of blockchain technology for cross-border transactions. Ripple has developed a blockchain-based system, similar to SWIFT, for cross-border processing and is working with a number of banks to trial it. We expect to see blockchain (ie distributed ledger technology) used alongside existing payment mechanisms as a way to bring efficiency to ledger management. Longer-term widespread use of blockchain technologies for cross-border payment processing would need to solve scaling issues (both in terms of processing speed and cost) as well as achieving buy-in from the majority of banks (as it would be a permissioned network).

Recent investment round for HomeSend

HomeSend concluded 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.

Sensitivities

Our forecasts and the share price are sensitive to the following factors:

Demand: the core business is reliant on selling extensions and upgrades to existing customers and winning business from new customers, the timing and size of which is difficult to predict.

Competition: eServGlobal’s core business competes with specialist mobile money software providers as well as larger mobile telecom-focused companies with wider service offerings.

HomeSend JV: as a minority shareholder, eServGlobal has limited control over the joint venture. The ability of the JV to reach profitability will depend on adoption of the HomeSend platform by MTOs and banks, the timing of which is uncertain. eServGlobal may need to inject additional funds into the JV to support it while it works to reach break-even.

Economic and political risk: the company’s historic focus on developing countries has meant it is exposed to the risk of political or economic upheaval in those countries. The focus on expanding geographical exposure should diversify this risk.

Currency: eServGlobal’s functional currency is the euro, while it reports in Australian dollars, leading to sometimes material translational currency gains or losses. As it has employees in several countries, there is some mismatch between revenues and operating costs.

Regulation: there is the risk that regulation related to mobile money could reduce demand for eServGlobal’s mobile wallet software. We note that PayMobile 4.0 is designed to be flexible enough to allow for different regulatory requirements.

Financials

Review of results for 14 months ending 31 December 2017

The company recently reported results for the 14-month period ending 31 December 2017 (FY17), reflecting the change in year-end from 31 October to 31 December. The company had previously reported results for the 12 months ended 31 October (12M17) in December 2017. Revenues were in line with our forecast, but the company incurred additional charges relating to challenging legacy contracts, resulting in gross profit and adjusted EBITDA below our forecasts. For FY17, the write-down of work-in-progress was A$3.5m. The provision against receivables was increased by A$4.9m in FY17, A$0.7m higher than for 12M17. In addition, cost of sales for the final two months of FY17 was higher than we had forecast. Adjusting out the WIP write-down, we calculate that gross margin was negative 8% for FY17, impacted by the delayed signing of contracts. So far in FY18, the company has closed contracts worth €5m that it had been expecting to close at the end of FY17. The company ended FY17 with a gross and net cash position of A$10.8m, having paid down all remaining debt.

We have introduced forecasts for FY18, working on the assumption that the company is able to achieve revenue close to the break-even level of €12m. With orders worth €5m received in the first two months of the year (not all of which will be recognised in FY18), the company is making progress with its plan to generate revenues from its existing customer base.

Exhibit 4: Results highlights

A$'000s

14 months to end CY17

FY18e

Estimate

Actual

Change

Revenues

12,159

12,240

0.7%

19,000

Gross profit

(2,171)

(4,489)

106.8%

6,591

Gross margin

-17.9%

-36.7%

(18.8%)

34.7%

Normalised gross profit

1,515

(991)

(165.4%)

6,591

Normalised gross margin

12.5%

-8.1%

(20.6%)

34.7%

Normalised EBITDA

(13,101)

(15,204)

16.0%

(409)

Normalised EBITDA margin

(107.7%)

(124.2%)

(16.5%)

(2.2%)

Normalised EBIT

(17,397)

(19,959)

14.7%

(3,779)

Normalised EBIT margin

(143.1%)

(163.1%)

(20.0%)

(19.9%)

Reported EBIT

(25,486)

(28,905)

13.4%

(3,929)

Normalised PBT

(25,031)

(27,540)

10.0%

(7,241)

Reported PBT

(33,119)

(36,486)

10.2%

(7,391)

Normalised net income

(25,492)

(28,188)

10.6%

(7,637)

Reported net income

(33,725)

(37,301)

10.6%

(7,791)

Normalised EPS

(3.77)

(4.17)

10.6%

(0.84)

Net debt/(cash)

(9,690)

(10,801)

11.5%

(7,318)

Source: eServGlobal, Edison Investment Research

Valuation

As eServGlobal is made up of two separate businesses, one that is not controlled by eServGlobal management, we have used a sum-of-the-parts valuation to assess the business. We look at the core business on a peer group multiples basis. We use DCF analysis to calculate potential values for eServGlobal’s share of the HomeSend JV.

Core business

In the table below, we show financial and valuation metrics for a selection of companies that specialise in selling mobile-related software. Median EBITDA margins are forecast to reach 13.3% this year and 14.3% next year, compared to our forecast for eServGlobal to be marginally loss-making in FY18e. We apply an EV/sales multiple of 0.55x FY18e revenues (a discount of 50% to peers to reflect the profitability profile), which results in an enterprise value of A$10.5m (0.64p per share).

Exhibit 5: Mobile software companies: valuation and financial performance

Rev growth

EBITDA margin (%)

EBIT margin (%)

EV/Sales (x)

EV/EBITDA (x)

Market cap (m)

CCY

CY

NY

CY

NY

CY

NY

CY

NY

CY

NY

CLX Technology

3624

SEK

23%

11%

8.6

9.8

4.9

6.6

1.1

0.9

12.3

9.7

Optiva

238

CAD

-19%

-1%

-15.0

0.7

N/A

N/A

1.2

1.2

N/A

173.4

Synchronoss

288

USD

23%

-29%

19.1

25.1

8.9

7.4

0.6

0.9

3.2

3.4

Verifone Systems

2528

USD

-4%

5%

16.5

16.6

14.2

14.9

1.8

1.7

10.9

10.4

Mean

6%

-3%

7.3

13.0

9.3

9.6

1.2

1.2

8.8

49.2

Median

10%

2%

12.5

13.2

8.9

7.4

1.1

1.1

10.9

10.1

Source: Bloomberg (as at 21 May 2018)

HomeSend

In the table below, we show the history of disclosure relating to the valuation of the HomeSend joint venture. We note that eServGlobal has participated in two funding rounds since the inception of the JV, putting in €3.5m in 2016 and a further €3.89m last month. When the company commissioned a valuation in September 2015, a 20% minority interest (MI) discount was applied to the resulting valuation – we have used this discount for all of the non-book value based valuations.

Exhibit 6: HomeSend valuation history

Value

eServGlobal's stake

After MI discount

Source

€m

€m

€m

A$m

Apr 2014: inception of JV

60.0

21.0

16.8

24.9

JV agreement

Sep 2015: company valuation

67.1

23.5

18.8

29.9

eServGlobal – DCF (WACC 13.5%)

Oct 2017: book value

21.6

eServGlobal - initial value of stake less losses to date plus subsequent funding rounds

Dec 2017: post funding round

56.0

20.0

16.0

24.6

Mastercard

Dec 2017: book value

26.3

eServGlobal - initial value of stake less losses to date plus subsequent funding rounds

Source: eServGlobal, Edison Investment Research

The company has stated that it does not agree with Mastercard’s valuation of the JV in the most recent round, and believes it significantly undervalues it.

Exhibit 7: Reverse sum-of-the-parts of eServGlobal

£m

A$m

Market cap

87.2

156.8

Net debt/(cash)

(10.8)

Enterprise value

146.0

Less core business (based on peer group EV/sales)

5.8

10.5

Implied value of HomeSend stake (35.7% interest in JV)

75.4

135.6

Implied value of HomeSend (100% of joint venture)

379.8

Less value of remittances business (based on DCF)

154.0

Implied value attributed to banking business

225.8

Source: Edison Investment Research

In the table above, we show a reverse sum-of-the-parts valuation. This takes the company’s current market cap, adjusts for the net cash position at the end of CY17, and removes our estimate for the valuation of the core business. This leaves the value of eServGlobal’s 35.69% stake in HomeSend. We then value the existing remittances business within HomeSend: we have constructed a DCF that assumes that HomeSend grows its share to 2% of the global remittance market over the next 10 years, that HomeSend charges 2.5% of the transaction value and earns 20% gross margins. We note that in two corridors, HomeSend has already achieved a 10% market share of inbound remittances. We assume that it moves to EBITDA profitability in FY19 and ultimately achieves operating margins of 13%. Based on working capital/sales and capex/sales both reducing down to 2% over the period, and using a WACC of 13% with a long-term growth rate of 2%, we value these cash flows at A$154.0m.

This leaves a further A$225.8m/US$169.8m which we estimate would be generated by processing banking payments on the platform. We assume that the bulk of fixed costs will be covered by the remittances business and that banking payments will also generate a 20% gross margin, with a further 5% of revenues spent on operating costs and a 25% tax rate. We therefore estimate that processing US$500m per annum in banking transactions value in perpetuity could be worth US$16.2m/A$21.5m to HomeSend. On this basis, we estimate that HomeSend is being given credit for processing banking transactions worth c $5bn, a tiny fraction of the cross-border payments market. Of the banking customers signed to date, the first 10 have average annual volumes of $300-500m (total addressable market $3-5bn pa) and the next five have average volumes of $30-50m pa (total addressable market of $150-250m pa). Progress in transitioning these banks’ volumes onto the HomeSend platform will be key to realising the value of the JV. The company has noted that it expects an inflection point in volumes in the short-term, although the precise timing is uncertain.

Exhibit 8: Financial summary

A$'000s

2012

2013

2014

2015

2016

2017

2017*

2018e

Year end 31 October/31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

28,070

31,003

31,261

25,866

21,577

10,791

12,240

19,000

Cost of Sales

(12,267)

(11,789)

(13,359)

(20,608)

(15,490)

(13,509)

(16,729)

(12,409)

Gross Profit

15,803

19,214

17,902

5,258

6,087

(2,718)

(4,489)

6,591

EBITDA

 

 

(1,936)

1,683

2,571

(10,449)

(6,982)

(11,709)

(15,204)

(409)

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

(7,277)

(660)

1,987

(12,469)

(10,039)

(15,391)

(19,959)

(3,779)

Amortisation of acquired intangibles

0

0

0

0

0

0

0

0

Exceptionals

(6,485)

5,997

28,735

(12,539)

(3,533)

(7,905)

(8,649)

0

Share-based payments

(624)

(456)

(438)

(54)

(75)

(160)

(297)

(150)

Operating Profit

(14,386)

4,881

30,284

(25,062)

(13,647)

(23,456)

(28,905)

(3,929)

Income from associate

0

0

(2,275)

(3,831)

(4,638)

(4,478)

(5,491)

(3,462)

Net Interest

(1,016)

(386)

(254)

(1,356)

(2,861)

(2,302)

(2,090)

0

Profit Before Tax (norm)

 

 

(8,293)

(1,046)

(542)

(17,656)

(17,538)

(22,171)

(27,540)

(7,241)

Profit Before Tax (FRS 3)

 

 

(15,402)

4,495

27,755

(30,249)

(21,146)

(30,236)

(36,486)

(7,391)

Tax

(187)

5,879

(13,515)

(2,125)

(596)

(592)

(681)

(200)

Profit After Tax (norm)

(5,805)

(732)

(379)

(14,125)

(14,030)

(22,605)

(28,054)

(7,437)

Profit After Tax (FRS3)

(15,589)

10,374

14,240

(32,374)

(21,742)

(30,828)

(37,167)

(7,591)

Average Number of Shares Outstanding (m)

196.8

241.1

253.1

264.0

366.6

640.2

676.4

906.9

EPS - normalised (c)

 

 

(3.01)

(0.36)

(0.20)

(5.41)

(3.88)

(3.53)

(4.17)

(0.84)

EPS - FRS 3 (c)

 

 

(7.98)

4.25

5.57

(12.33)

(5.98)

(4.82)

(5.51)

(0.86)

DPS (c)

0.00

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%)

(36.7%)

34.7%

EBITDA Margin (%)

(6.9%)

5.4%

8.2%

(40.4%)

(32.4%)

(108.5%)

(124.2%)

(2.2%)

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

(25.9%)

(2.1%)

6.4%

(48.2%)

(46.5%)

(142.6%)

(163.1%)

(19.9%)

BALANCE SHEET

Fixed Assets

 

 

16,303

14,330

43,431

42,928

33,274

27,567

31,373

26,931

Intangible Assets

9,386

3,523

9,011

6,939

5,598

4,411

3,856

2,856

Tangible Assets

912

482

3

84

32

136

127

147

Other Fixed Assets

6,005

10,325

34,417

35,905

27,644

23,020

27,390

23,928

Current Assets

 

 

18,136

38,855

30,761

34,895

28,240

40,361

16,499

16,643

Stock

 

 

158

74

173

66

72

110

139

139

Debtors

 

 

14,094

21,846

26,811

24,403

17,976

6,870

4,181

7,808

Cash

 

 

3,794

4,909

3,679

4,976

9,375

33,255

10,801

7,318

Other

 

 

90

12,026

98

5,450

817

126

1,378

1,378

Current Liabilities

 

 

(12,934)

(15,082)

(18,033)

(25,520)

(14,469)

(11,812)

(10,810)

(14,053)

Creditors

(11,665)

(11,932)

(13,010)

(22,285)

(14,189)

(11,812)

(10,757)

(14,000)

Taxation & social security

(69)

(150)

(2,023)

(235)

(280)

0

(53)

(53)

Short term borrowings

(1,200)

(3,000)

(3,000)

(3,000)

0

0

0

0

Long Term Liabilities

 

 

(6,431)

(749)

(865)

(19,532)

(12,649)

(20,392)

(777)

(777)

Long term borrowings

(6,000)

0

0

(16,531)

(11,759)

(19,075)

0

0

Other long term liabilities

(431)

(749)

(865)

(3,001)

(890)

(1,317)

(777)

(777)

Net Assets

 

 

14,989

37,154

55,070

32,359

33,823

35,718

36,158

28,417

CASH FLOW

Operating Cash Flow

 

 

(11,901)

(7,207)

(5,810)

(12,130)

(10,712)

(9,492)

(12,630)

(793)

Net Interest

(974)

(580)

(271)

(423)

(175)

0

(2,735)

0

Tax

(7,813)

(1,088)

2,018

(3,148)

(1,159)

(719)

(132)

(300)

Capex

(1,966)

(1,950)

(6,403)

(2,921)

(1,583)

(2,351)

(2,821)

(2,390)

Acquisitions/disposals

23,307

0

5,418

0

5,133

0

0

0

Financing

(77)

16,140

3,964

4,365

15,929

32,007

32,286

0

Dividends

(111)

0

(146)

0

0

(579)

(581)

0

Net Cash Flow

465

5,315

(1,230)

(14,257)

7,433

18,866

13,387

(3,483)

Opening net debt/(cash)

 

 

3,871

3,406

(1,909)

(679)

14,555

2,384

2,384

(10,801)

HP finance leases initiated

0

0

0

0

48

0

0

0

Other

0

0

0

977

(4,690)

2,302

202

0

Closing net debt/(cash)

 

 

3,406

(1,909)

(679)

14,555

2,384

(14,180)

(10,801)

(7,318)

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

Contact details

Revenue by geography

eServGlobal
224 Avenue Pierre Brossolette

92245 Malakoff Cedex,

France

www.eservglobal.com

N/A

Contact details

eServGlobal
224 Avenue Pierre Brossolette

92245 Malakoff Cedex,

France

www.eservglobal.com

Revenue by geography

N/A

Management team

Executive chairman: John Conoley

CFO: Andrew Hayward

John began his career in the IT industry with IBM in 1983, and worked in a range of industries in technical, sales and marketing roles. Since then, he has held general management and director-level roles in small and medium-sized private and public companies. His most recent roles include non-executive director with IT security company Vistorm, head of the £1.6bn B2B Energy Division at Eon and, most recently, CEO of mobile device company Psion, an international company listed in the UK.

Andrew is an experienced finance executive with senior strategic advisory and investor relations experience. Prior to joining eServGlobal, he held the role of Head of Finance at Hurricane Energy plc, in which he worked closely with the investment community in London, overseeing a successful IPO while also driving the financial growth of the company. Previously he has worked in various roles at PwC, latterly within the Corporate Finance Lead Advisory practice.

COO: James Hume

James has more than 15 years’ extensive experience in developing and delivering commercial enterprise software for the telco and financial services worlds. His background includes customer-facing roles in various international markets, working closely with multiple stakeholders to deliver strategic and dynamic technology solutions.

Management team

Executive chairman: John Conoley

John began his career in the IT industry with IBM in 1983, and worked in a range of industries in technical, sales and marketing roles. Since then, he has held general management and director-level roles in small and medium-sized private and public companies. His most recent roles include non-executive director with IT security company Vistorm, head of the £1.6bn B2B Energy Division at Eon and, most recently, CEO of mobile device company Psion, an international company listed in the UK.

CFO: Andrew Hayward

Andrew is an experienced finance executive with senior strategic advisory and investor relations experience. Prior to joining eServGlobal, he held the role of Head of Finance at Hurricane Energy plc, in which he worked closely with the investment community in London, overseeing a successful IPO while also driving the financial growth of the company. Previously he has worked in various roles at PwC, latterly within the Corporate Finance Lead Advisory practice.

COO: James Hume

James has more than 15 years’ extensive experience in developing and delivering commercial enterprise software for the telco and financial services worlds. His background includes customer-facing roles in various international markets, working closely with multiple stakeholders to deliver strategic and dynamic technology solutions.

Principal shareholders

(%)

Lombard Odier

20.80

L&G

13.74

Canaccord Genuity

11.95

Prudential

9.47

Blue Lake Partners

4.84

Commonwealth Bank of Australia

4.54

Acorn Capital

3.55

Companies named in this report

CLX Technology, Earthport, Mastercard, Optiva, Synchronoss, Verifone Systems

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.

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

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.

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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