H116 results in line; order recovery underway

eServGlobal 4 July 2016 Update

eServGlobal

H116 results in line; order recovery underway

H116 results

Software & comp services

4 July 2016

Price

4.25p

Market cap

£13m

A$1.806:€1.11:£1

Net debt (A$m) at end H116

19.8

Shares in issue

297.6m

Free float

94%

Code

ESG

Primary exchange

AIM

Secondary exchange

ASX

Share price performance

%

1m

3m

12m

Abs

(15.0)

(3.2)

(75.1)

Rel (local)

(18.6)

(8.0

(74.7)

52-week high/low

17.1p

2.0p

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 events

EGM

22 July 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

eServGlobal has reported H116 results in line with its recent trading update and confirmed that it continues to expect to report a small positive EBITDA for FY16. Once approved, the proposed fund-raising and debt restructure should strengthen the company’s balance sheet and provide funds to support the growth of the core business.

Year end

Revenue (A$m)

EBITDA*
(A$m)

EPS*
(c)

DPS
(c)

P/E
(x)

EV/EBITDA
(x)

10/14

31.3

2.6

(0.20)

0.0

N/A

14.6

10/15

25.9

(10.4)

(5.41)

0.0

N/A

N/A

10/16e

29.9

0.1

(3.18)

0.0

N/A

N/A

10/17e

32.0

2.0

(1.57)

0.0

N/A

19.1

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

H116 results in line with recent trading update

eServGlobal has reported H116 results in line with guidance given in its recent trading update: revenues A$8.4m, adjusted EBITDA loss A$6.6m, reported EBITDA loss A$8.8m and net debt A$19.8m. Management has reiterated its outlook for FY16, expecting a small positive EBITDA for the year, and confirmed that the recovery in order flow has continued into the first two months of H216. Other than factoring in the recently issued shares, our forecasts are substantially unchanged.

Fund-raising and debt refinancing to strengthen the balance sheet

The company is partway through a fund-raising. It has already issued 31.9m shares at 4p per share under existing authorities (gross proceeds £1.3m/A$2.4m) and is seeking shareholder approval to issue a further 342.5m shares at 4p per share. Combined with a proposed debt refinancing, this should put the company on surer footing and provide the funds to grow the core business. An EGM is scheduled for 22 July to approve both the fund-raising and debt restructure.

Valuation: Improving confidence

Based on eServGlobal’s current market cap of £13m and adjusting for the third-party valuation of its stake in HomeSend, the implied value of the core business is £6.7m, equivalent to an EV/sales multiple of 0.4x 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. Shareholder approval of the fund-raising and debt restructure should provide further confidence in the business and, once consistent order flow is established and profitability resumed, the valuation should trend upwards. With the payment institution licence in place and the new data centre in use, HomeSend is now positioned to grow transaction volumes and revenues, which should provide additional support to the share price.

H116 results

eServGlobal has reported H116 results in line with its recent trading update (see Exhibit 1). The outlook is unchanged, with management still expecting the company to report a small positive adjusted EBITDA for FY16. The company noted that the recovery in order flow had continued into the first two months of H216.

Exhibit 1: H1 results

A$m

H116

H115

y-o-y

Revenues

8.36

12.83

(34.8%)

Gross profit

0.45

6.41

(92.9%)

Gross margin

5.4%

50.0%

(44.5%)

EBITDA

(8.81)

(6.99)

(26.0%)

EBITDA margin

(105.3%)

(54.5%)

(50.9%)

Normalised EBITDA

(6.56)

(3.12)

(110.4%)

Normalised EBITDA margin

(78.4%)

(24.3%)

(54.1%)

Net income

(12.22)

(7.65)

(59.8%)

Net debt

19.84

14.56

36.3%

Source: eServGlobal

Changes to forecasts

Our forecasts are substantially unchanged, bar incorporating the first tranche of shares issued on 16 June as part of the recently announced fund-raising. 31.87m shares were issued under existing authorities, raising gross proceeds of £1.27m/A$2.44m.

The company is holding an EGM on 22 July to approve the remainder of the fund-raising:

Conditional offer: 268,133,893 shares at 4p per share for gross proceeds of £10.7m, of which £4.4m will be an exchange of debt for equity by AlphaGen Volantis (eServGlobal’s largest shareholder).

Open offer: 74,410,039 shares at 4p per share for gross proceeds of £3.0m.

The company is also refinancing its debt, planning a term loan of £7m repayable on 30 June 2019, with an interest rate of 1% per month. This can be repaid at any time with no repayment premium.

Exhibit 2: Changes to forecasts

A$000s

FY16e old

FY16e new

Change (%)

FY17e old

FY17e new

Change (%)

Revenues

29,898

29,889

0.0

32,027

32,017

0.0

Gross profit

14,451

14,230

(1.5)

16,265

16,260

0.0

Gross margin

48.3%

47.6%

(0.7)

50.8%

50.8%

0.0

Normalised EBITDA

51

64

26.0

1,965

1,964

(0.1)

Normalised EBITDA margin

0.2%

0.2%

0.0

6.1%

6.1%

0.0

Normalised EBIT

(3,049)

(3,036)

0.4

(1,435)

(1,436)

0.1

Normalised EBIT margin

-10.2%

-10.2%

0.0

-4.5%

-4.5%

0.0

Reported EBIT

(5,999)

(3,463)

42.3

(3,035)

(3,036)

0.0

Normalised PBT

(10,553)

(10,868)

(3.0)

(5,661)

(5,662)

0.0

Reported PBT

(13,503)

(11,295)

16.4

(7,261)

(7,262)

0.0

Normalised net income

(8,572)

(8,824)

(2.9)

(4,659)

(4,660)

0.0

Reported net income

(10,932)

(9,166)

16.2

(5,939)

(5,940)

0.0

Normalised EPS

(3.23)

(3.18)

1.5

(1.75)

(1.57)

10.7

Net debt/(cash)

15,928

13,524

(15.1)

16,582

14,167

(14.6)

Source: Edison Investment Research


Exhibit 3: 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

29,889

32,017

Cost of Sales

(4,234)

(12,267)

(11,789)

(13,359)

(20,608)

(15,659)

(15,757)

Gross Profit

2,783

15,803

19,214

17,902

5,258

14,230

16,260

EBITDA

 

 

(6,694)

(1,936)

1,683

2,571

(10,449)

64

1,964

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

(8,601)

(7,277)

(660)

1,987

(12,469)

(3,036)

(1,436)

Amortisation of acquired intangibles

0

0

0

0

0

0

0

Exceptionals

0

(6,485)

5,997

28,735

(12,539)

378

0

Share-based payments

(261)

(624)

(456)

(438)

(54)

(805)

(1,600)

Operating Profit

(8,862)

(14,386)

4,881

30,284

(25,062)

(3,463)

(3,036)

Income from associate

0

0

0

(2,275)

(3,831)

(4,562)

(1,559)

Net Interest

164

(1,016)

(386)

(254)

(1,356)

(3,270)

(2,667)

Profit Before Tax (norm)

 

 

(8,437)

(8,293)

(1,046)

(542)

(17,656)

(10,868)

(5,662)

Profit Before Tax (FRS 3)

 

 

(8,698)

(15,402)

4,495

27,755

(30,249)

(11,295)

(7,262)

Tax

(560)

(187)

5,879

(13,515)

(2,125)

2,259

1,452

Profit After Tax (norm)

(8,997)

(5,805)

(732)

(379)

(14,125)

(8,694)

(4,530)

Profit After Tax (FRS3)

(9,258)

(15,589)

10,374

14,240

(32,374)

(9,036)

(5,810)

Average Number of Shares Outstanding (m)

196.8

196.8

241.1

253.1

264.0

277.8

297.6

EPS - normalised (c)

 

 

(4.59)

(3.01)

(0.36)

(0.20)

(5.41)

(3.18)

(1.57)

EPS - FRS 3 (c)

 

 

(4.73)

(7.98)

4.25

5.57

(12.33)

(3.30)

(2.00)

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%

47.6%

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

38,928

33,677

Stock

 

 

170

158

74

173

66

66

66

Debtors

 

 

40,425

14,094

21,846

26,811

24,403

26,204

28,069

Cash

 

 

10,129

3,794

4,909

3,679

4,976

12,341

5,224

Other

 

 

90

90

12,026

98

5,450

317

317

Current Liabilities

 

 

(40,856)

(12,934)

(15,082)

(18,033)

(25,520)

(37,539)

(40,064)

Creditors

(19,952)

(11,665)

(11,932)

(13,010)

(22,285)

(19,080)

(20,438)

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

26,465

22,638

CASH FLOW

Operating Cash Flow

 

 

(8,060)

(11,901)

(7,207)

(5,810)

(12,130)

(1,038)

1,457

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

5,133

0

Financing

(33,230)

(77)

16,140

3,964

4,365

(1,465)

0

Dividends

(23,910)

(111)

0

(146)

0

0

0

Net Cash Flow

(64,691)

465

5,315

(1,230)

(14,257)

1,031

(643)

Opening net debt/(cash)

 

 

(60,820)

3,871

3,406

(1,909)

(679)

14,555

13,524

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

13,524

14,167

Source: eServGlobal, Edison Investment Research

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