On the front foot

eServGlobal 5 September 2016 Outlook

eServGlobal

On the front foot

Fund-raising

Software & comp services

5 September 2016

Price

6.0p

Market cap

£38m

A$1.76/€1.19/£

Net debt (A$m) at end H116

19.8

Shares in issue

640.2m

Free float

96%

Code

ESG

Primary exchange

AIM

Secondary exchange

ASX

Share price performance

%

1m

3m

12m

Abs

16.7

22.5

(56.0)

Rel (local)

12.2

11.1

(60.7)

52-week high/low

13.9p

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

FY16 results

December 2016

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’s recent fund-raising and debt restructuring has put the company on a firmer footing, creating a healthy cash position to support growth. After a period of restructuring, the core business has a reduced cost base and is starting to show signs of positive contract momentum. HomeSend has used recent investment from the JV partners to strengthen the platform and focus on marketing the service. Successful recovery of the core business combined with adoption of the HomeSend platform should provide upside to the current share price.

Year
end

Revenue (A$m)

EBITDA*
(A$m)

EPS*
(c)

DPS
(A$)

P/E
(x)

EV/EBITDA
(x)

10/14

31.3

2.6

(0.20)

0.0

N/A

25.3

10/15

25.9

(10.4)

(5.41)

0.0

N/A

N/A

10/16e

29.9

0.1

(2.27)

0.0

N/A

N/A

10/17e

32.0

2.0

(0.80)

0.0

N/A

33.5

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

Fundraising strengthens balance sheet

The recent issue of 374m shares has raised net cash proceeds of £10.9m, which combined with a £4.4m debt/equity swap has moved the company from a net debt position of A$19.8m at the end of H116 to an estimated net cash position of A$0.6m as at the end of FY16. This provides the company with funds to support the core business and reduces the level of ongoing interest expense. We have revised our forecasts to reflect the share issue and new debt structure.

Core business targeting positive EBITDA this year

After a period of restructuring, management has reduced the cost base of the core business, reshaped the sales function and brought more discipline to the sales process. Measures that should help profitability include customer adoption of the PayMobile 3.0 platform (which should reduce the amount of software customisation required) and widening the target customer base to Asia-Pacific and Latin America. Management continues to target positive EBITDA for FY16.

Valuation: HomeSend to drive upside

With the company now on a more secure footing, the share price has increased from the 4p fund-raising level to the current 6.0p level. Based on a sum-of-the-parts valuation, we calculate a per share value of 10.7p. We value the core business at a discount to mobile software peers to reflect its profitability profile. We assume that the HomeSend JV is successful in reaching break-even in FY17, growing its share of the international remittance market to 2% by FY25. For the value of the JV to be reflected in the share price, investors will need to see regular operational updates tracking new hub members, live corridors, volumes transacted and progress towards profitability.

Investment summary

Company description: Supporting mobile money

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 international remittances, which operates through its 35% stake in the HomeSend joint venture – the JV is focused on driving adoption of the hub with the aim of reaching profitability in 2017.

Financials: Strengthened balance sheet

We have revised our forecasts to take into account the recent fund-raising and debt restructure. We estimate that as at the end of FY16, the company will have a net cash position of A$0.6m, with more than sufficient cash on the balance sheet to fund the core business. Our underlying forecasts for the core business are unchanged; we continue to forecast a small positive EBITDA in FY16 rising to an EBITDA margin of 6.1% in FY17.

Exhibit 1: Changes to forecasts

EPS (c)

PBT (A$m)

EBITDA (A$m)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2016e

(3.18)

(2.27)

28.4

(10.87)

(10.26)

5.6

0.06

0.06

0.0-

2017e

(1.57)

(0.80)

49.2

(5.66)

(6.20)

(9.5)

1.96

1.96

0.0-

Source: Edison Investment Research

Valuation: HomeSend to drive upside

Based on a sum-of-the-parts valuation, we calculate a per share value of 10.7p. We value the core business at a discount to mobile software peers to reflect its profitability profile. We assume that the HomeSend JV is successful in reaching break-even in FY17, growing its share of the international remittance market to 2% by FY25 and achieving operating margins of 16% in the long term. For the JV value to be reflected in the share price, investors will need to see regular operational updates tracking new hub members, live corridors, volumes transacted and progress towards profitability.

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 for international remittances by 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. Exposure to large shareholder: the largest shareholder has a 24.8% stake and has lent the company £7m. Regulation: regulation related to mobile money could reduce demand for eServGlobal’s mobile wallet software.

Company description: Mobile money

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 FY15, 80% of revenues were generated from the Middle East and Africa. eServGlobal has also developed a hub for international remittances, which operates through its stake in the HomeSend joint venture. After a period of restructuring, the company is focused on growing its core software business and supporting the HomeSend JV.

Company background

eServGlobal was founded in 1982 and has operated several different telecom-related technology businesses. The company currently consists of two businesses: software for mobile money and recharge services and an international remittance service (HomeSend). In 2013, eServGlobal created a joint venture with MasterCard and BICS for the HomeSend service, of which it now owns 35%. eServGlobal listed on the ASX in 2003 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 April. Paolo Gagliardi took on the COO role in 2015. In the medium term, the board composition will be reviewed, and may ultimately require a CEO and CFO.

Core business: Mobile money 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 (3.0) was completed in H115 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).

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

Roughly 70% of revenues are generated from Recharge (VMS and EVD), although Mobile Money is growing faster so is making up an increasing proportion of revenues. The company is looking to upgrade existing Recharge customers to its Mobile Money solution, as well as targeting new customers with the solution.

Background to the prepaid market

Prepaid subscribers are mobile phone users who buy credit for their phones in advance on an ad hoc basis, as opposed to customers on a monthly contract with an MNO. Due to lower income levels, many customers not having bank accounts and customers with little or no credit history, prepaid contracts are a prominent feature of developing markets (see Exhibit 2).

The crucial difference between prepaid and contract subscribers is the way that the MNO is paid for airtime/data. In developed markets, prepaid subscribers tend to phone up, use an ATM or use an app to buy airtime credit; this is possible as subscribers tend to have bank accounts to which they can link, either via direct debit or by charging a debit or credit card. In some cases, subscribers may choose to go to a shop that offers this service and pay in cash. In developing markets, for the majority of users, the cash route is the only option. This means that the MNO needs a network of agents across the country that can take cash in return for issuing some kind of airtime credit: either a paper voucher in the form of a scratch card or an electronic voucher (typically an SMS with a code that the subscriber enters into the phone). In either case, there is a network of agents that needs to be managed and vouchers for airtime that need to be created and tracked. Paper vouchers need to be designed, printed, distributed and tracked. Electronic vouchers need to be tracked from issue to redemption in real time.

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.

Exhibit 2: Percentage of subscribers with prepaid contracts

Source: The Mobile Economy 2013 – AT Kearney & GSMA Wireless Intelligence

Shifting to using the phone for financial services

In many developing countries, there are more mobile phone subscribers than there are adults with bank accounts. This has led to the development of services that exploit the agent network and ubiquity of phone ownership to provide mobile phone subscribers with financial services. In this case, the airtime that is acquired is treated as a store of value. Someone wanting to send cash to a relative in another part of the country where one or neither party has a bank account, or where access to a bank branch is difficult, can use the transfer of airtime as a means of transferring cash. The sender buys $10 of airtime via an agent and provides the agent with the phone number of the recipient. This is transferred via the mobile phone network and the recipient visits their closest agent with their phone to redeem the cash value of the airtime. The best-known and most successful example of this is M-Pesa in Kenya, operated by Safaricom. At the end of FY16 (31 March 2016), M-Pesa had 16.6 million active users, out of a Safaricom subscriber base of 25.2 million and a population of 47 million. The service generated revenues of c £310m in FY16 (+27% y-o-y).

While the most basic method of transfer involves airtime, more operators are offering mobile wallets that act as a store of value that can either be cashed in or used to pay for things where wallets are accepted. 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). From a government perspective, sending or receiving money this way reduces the potential for corruption and reduces cash management expenses and complexity.

Supporting the unbanked

Globally there are currently c 7.8 billion cellular subscriptions across c 4.8 billion subscribers (source: GSMA). We note the total subscription number includes machine-to-machine connections estimated at c 3% of the total. In many countries, the number of subscriptions exceeds the size of the population as subscribers may have mobile contracts on more than one device, may have a work and personal phone; or in the case of prepaid subscribers may own multiple SIM cards, which they swap around to make the best of special offers from MNOs.

It is estimated that there are two billion adults (c 37% of the adult population) who have no or very limited access to a bank account1 (source: World Bank - The Little Data Book on Financial Inclusion 2015). Of the 62.7% of the population with an account, 60.7% or 3.18 billion adults have an account with a financial institution, 1% or 53 million have an account with a mobile money provider and another 1% or 53 million have a mobile money account linked to a bank account (source: World Bank Findex Report 2014). In high-income OECD economies, bank account penetration stands at 94%, whereas in the Middle East it stands at 14% and sub-Saharan Africa at 34%. In sub-Saharan Africa, a third of adults with access to a bank account have access solely via a mobile money provider. At the end of 2015, the GSMA estimated that there were 270 mobile money schemes deployed across 90 countries, up from 100 deployments three years previously. Most mobile money accounts are available via multiple-access methods on the mobile: the most common is USSD2 followed by apps, STK (SIM toolkit) and IVR (interactive voice response).

  This is defined as having an account with a financial institution (bank, credit union, microfinance institution [MFI], co-operative) or through a mobile money provider.

  USSD: unstructured supplementary service data – the protocol for sending text across GSM networks.

With its smartphone app, eServGlobal is able to support the growing number of smartphone owners in the developing world. Smartphone penetration currently stands at more than 50% in the EU versus c 20% in sub-Saharan Africa and c 40% in the Middle East. This is forecast to grow to 75%, 55% and 65%, respectively, by 2020 (source: GSMA 2014 State of the Industry – Mobile Financial Services for the Unbanked). Roughly two-thirds of current mobile money services are available on smartphone apps and we expect this proportion to grow as smartphone penetration increases.

Customer base – developing markets

eServGlobal’s customers are based in the Middle East, Africa and Asia-Pacific. The company currently has no customer in Latin America, but is now actively marketing in the region. 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 3: Selected eServGlobal customers

Customer

Countries of operation

Total subs
(m)

Countries with live eServ services

Est subs covered (m)

Alfa Telecom

Lebanon

2.0

Lebanon

2.0

Nepal Telecom

Nepal

13.3

Nepal

13.3

Ooredoo

Qatar, Kuwait, Algeria, Tunisia, Myanmar, Maldives, Iraq, Oman, Palestine, Pakistan, Philippines, Indonesia

130.0

Algeria, Tunisia, Iraq, Indonesia (Indosat)

114.3

Sistema (MTS)

Russia, Ukraine, Armenia, Turkmenistan, Uzbekistan, Belarus

108.3

Armenia

2.1

Zain

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

45.6

Iraq, Jordan, Kuwait, Saudi Arabia

19.0

Total

299.7

150.7

Source: eServGlobal, company reports, Edison Investment Research

After using eServGlobal Recharge solutions for several years, in 2013 Zain signed a three-year framework agreement for the provision of end-to-end mobile financial services solutions at a group level. In some of the countries in which Zain operates, more than 90% of the adult population have no access to financial services. Zain launched live services in Jordan and Saudi Arabia in 2015 and in Iraq earlier this year. We would expect to see additional licence sales as Zain rolls out the services to its affiliates.

Competition

The core business competes with a variety of mobile billing software providers, most frequently with the companies in Exhibit 4.

Exhibit 4: 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

Private

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).

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

Sales strategy – building the channel

eServGlobal’s direct sales team consists of six employees in Dubai (covering the Gulf, Asia and Africa) and two in Latin America. Pre-sales staff are located in Dubai, France and Indonesia.

To supplement direct sales, eServGlobal is increasing the number of partners with which it works. This includes working with larger telecom equipment vendors to provide the recharge/mobile money element of larger deployments.

eServGlobal also aims to work with HomeSend. For example, to use the HomeSend platform for international remittances via mobile, end-customers need to have a mobile wallet provided by their own MNO – eServGlobal is able to provide software to support an MNO’s domestic wallet requirements. HomeSend and eServGlobal are working on their first joint deployment, due for imminent launch.

Growth strategy

Management is targeting growth in the core business from:

Geographic expansion: having been very focused on the Gulf region, the company is working to widen its geographic reach. South East Asia and Latin America are focus markets, with new regulation relating to mobile money opening up prospects in the latter region. The recent contract win in West Africa shows that the company is making progress outside of the Gulf;

Focusing on selling standardised solutions made possible by the PayMobile 3.0 platform. This reduces the amount of customisation required and results in services going live more quickly, which enables contracts to move into the support and maintenance phase more quickly, in turn driving recurring revenues;

Increasing the penetration of its software with existing customers (eg licence extensions for increased numbers of subscribers, rolling out to new geographies in an operator group);

Winning new Mobile Money customers. MNOs are keen to reduce subscriber churn – mobile wallets are attractive as subscribers are less likely to change their financial services provider as frequently as they currently swap SIM cards. The company is also keen to support existing recharge customers as they extend the mobile wallet option to their customers; and

Growing the indirect sales channel.

Developing transaction-based services enabled by PayMobile 3.0 software, thereby increasing recurring revenues. The first contract on this basis is about to be launched.

Developing data analytics tools for customers to enable them to leverage the data running through their platforms.

HomeSend JV

eServGlobal has a 35% stake in the HomeSend JV (the other partners are MasterCard with 55% and BICS with 10%). HomeSend is an international mobile remittance platform. For the history of how the JV was created see “Supporting mobile money in the developing world” (August 2015).

International remittance market

The international remittance3 market was worth $582bn in 2015 according to the World Bank, of which $432bn was sent home by migrants from developing countries. The market is made up of traditional MTOs4 (global and regional), banks, post offices, card networks and newer digital-only companies. The two largest players are Western Union (FY15: revenues $5.5bn, transactions processed $82bn) and MoneyGram (FY15: revenues $1.4bn).

Person-to-person money transfers.

MTO: money transfer organisation

Traditionally, an MTO would operate a network of agents in many countries. Agents can receive or pay out remittances and are able to service the segment of the market that does not have a bank account. More recently, digital-only MTOs have been established (Azimo, TransferWise, WorldRemit, Xoom) where users send and receive money via mobile or online channels, removing the need for an agent network.

The World Bank’s international remittances database is updated quarterly for 365 country corridors (consisting of 48 sending countries and 106 receiving countries), tracking the cost to send money by sending party (eg Western Union, WorldRemit), sending method, receiving method and time to access funds. Data as at June 2016 shows an average cost to send $200 (or local equivalent) of 7.60%, only marginally down from 7.68% in Q215, but more materially down from 9.67% at the beginning of 2009. This cost varies by region: the average cost to send to sub-Saharan Africa is 9.58% compared to 5.56% to send to South Asia. HomeSend is aiming to achieve a total cost of remittance of 4-5%, of which it retains c 1% with the remainder shared between the sending and receiving organisations.

The HomeSend hub

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 (MTOs, banks, post offices, etc). eServGlobal reported that at the end of April, HomeSend had 3,800 live corridors from more than 200 sending countries and 36 receiving countries. 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.

Companies that have joined HomeSend include those in Exhibit 5. We expect that many MTOs sign up to use HomeSend to supplement the networks they have already created. This enables them to access countries where they do not have an existing agent network (by working with an MNO that already has one) or to make use of mobile wallet capabilities, enabling them to expand their networks at much lower incremental cost. In other cases, sending organisations will use HomeSend for lowest cost routing.

Exhibit 5: Selected partners of HomeSend

Company - Sending

Business

Company - Receiving

Business

EastNets

Payments & compliance provider

Maroc Telecom

MNO - Morocco

Microfinance International Corporation

MFI - US

MTN

MNO – Ghana, Ivory Coast

SmartPay

PSP - China

Smart Communications

MNO - Philippines

Wafacash

MTO - North Africa

Ooredoo

MNO - Middle East

VNPT EPAY

PSP - Vietnam

Lycatel

MVNO

mHITs

Mobile payments - Australia

Airtel Africa

MNO - Africa

Tranglo

Remittance hub

Telesom

MNO - Somalia

Xpress Money

MTO

Merchantrade Malaysia

MVNO - Malaysia/ MTO

Moneytrans

MTO

Indosat

MNO - Indonesia

WorldRemit

MTO

M-PAiSA (Vodafone)

MNO - Fiji

PostFinance

FI - Switzerland

eZ Cash (Dialog Axiata)

MNO - Sri Lanka

Brastel Remit

MTO - Japan

MobiDram (Vivacell-MTS)

Mobile financial service provider - Armenia

M Lhuillier

MTO - Philippines

M-Pesa (Vodafone)

Albania, DRC, Ghana, Kenya, Lesotho,

MoneyGram

MTO

Mozambique, Romania, Tanzania

eTranzact*

PSP, mobile payments

Steward Bank*

Bank - Zimbabwe

Azimo

MTO

Xoom

MTO

Lycaremit

MTO

Viamericas

MTO – the Americas

XendPay

MTO

Geoswift

MTO - China

Hello Paisa

MTO – South Africa

Paysafe (Skrill & Neteller)

eWallet providers

Source: eServGlobal. Note: *Signed up by the MasterCard sales team.

Since the launch of the joint venture, HomeSend has signed up a number of MTOs, including some of the highest profile (eg MoneyGram, Xoom, Viamericas, WorldRemit), and has expanded the geographical coverage of the network. MoneyGram signed up in 2014, as it does not yet have a mobile send/receive facility. It started with Kenya as a receiving country, where funds can be transferred to an M-Pesa account, and we believe it plans to expand the use of HomeSend to other corridors. Digital MTOs are also signing up – WorldRemit joined HomeSend in 2013 with an initial focus on corridors between Europe and Africa; Azimo joined in 2015 and now provides mobile wallet services in 10 countries. Paysafe strengthened its relationship with HomeSend: Skrill already used HomeSend and Paysafe recently extended its agreement to cover the NETELLER wallet – it has live services using HomeSend in six countries.

Growth strategy for HomeSend

Partners invested an additional €10m in the JV over the last year; eServGlobal invested €3.5m to maintain its 35% stake. This was used to fund several initiatives to support the growth of the JV, including co-funded marketing initiatives with MNOs to stimulate subscriber demand, a new PCI-DSS5 compliant data centre in order to connect to the MasterCard network and acquisition of a payment institution licence.

  PCI-DSS: Payment Card Industry – Data Security Standard.

MasterCard announced last year that MasterCard Send would use HomeSend for international remittances. Through a single connection to the MasterCard Send platform, businesses, merchants, issuers, governments, non-profits and other senders can send money to consumers whether they are banked or unbanked, and located domestically or abroad. Senders or recipients do not need to be MasterCard cardholders. MasterCard Send has been launched in three “send-to-card” markets (Russia, Ukraine and the Philippines) and intends to rollout to other countries over the next two years.

MasterCard is encouraging its customers to use HomeSend for more than just remittances and H116 saw the platform used for payments and disbursements.

Sensitivities

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

Demand: the core business is reliant on winning business from new customers and selling extensions and upgrades to existing customers. The timing and size of such wins is 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: 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 for international remittances by MTOs, 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: until recently the company’s 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, as evidenced by the growing qualified pipeline with a much wider geographic spread.

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.

Exposure to large shareholder: the largest shareholder has a 24.8% stake in the business and has lent the company £7m.

Regulation: there is the risk that regulation related to mobile money could reduce demand for eServGlobal’s mobile wallet software. We note that PayMobile 3.0 is designed to be flexible enough to allow for different regulatory requirements.

Financials

Via a conditional placing, the company recently issued 300m shares at a price of 4p/A$0.08. In addition, via an open offer, the company has issued 74.4m shares at the same price. In total the company has issued shares worth £15.9m, with net cash proceeds totalling £10.9m. The company has used £0.6m of the cash proceeds to repay some of the £12m debt previously lent by AlphaGen Volantis and swapped £4.4m of that £12m debt for 110.14m shares. To settle the remaining £7m debt outstanding, AlphaGen Volantis advanced a new £7m loan repayable on 30 June 2019 at an interest rate of 1% per month (all payable at the end of the term).

The table below shows the changes we have made to our forecasts to reflect the share issue and debt restructuring. We have also updated our forecasts for the contribution from the JV to reflect the most recent HomeSend accounts. We have made no other changes to our forecasts, which continue to assume that the company reaches EBITDA break-even this year.

Exhibit 6: Changes to forecasts

A$000s

FY16e old

FY16e new

Change

FY17e old

FY17e new

Change

Revenues

29,889

29,889

0.0%

32,017

32,017

0.0%

Gross profit

14,230

14,230

0.0%

16,260

16,260

0.0%

Gross margin

47.6%

47.6%

0.0%

50.8%

50.8%

0.0%

Normalised EBITDA

64

64

0.0%

1,964

1,964

0.0%

Normalised EBITDA margin

0.2%

0.2%

0.0%

6.1%

6.1%

0.0%

Normalised EBIT

(3,036)

(3,036)

0.0%

(1,436)

(1,436)

0.0%

Normalised EBIT margin

-10.2%

-10.2%

0.0%

-4.5%

-4.5%

0.0%

Reported EBIT

(3,463)

(2,758)

20.4%

(3,036)

(1,736)

-42.8%

Normalised PBT

(10,868)

(10,261)

5.6%

(5,662)

(6,202)

-9.5%

Reported PBT

(11,295)

(11,786)

-4.3%

(7,262)

(6,502)

10.5%

Normalised net income

(8,824)

(8,339)

5.5%

(4,660)

(5,092)

-9.3%

Reported net income

(9,166)

(9,559)

-4.3%

(5,940)

(5,332)

10.2%

Normalised EPS (c)

(3.18)

(2.27)

28.4%

(1.57)

(0.80)

49.2%

Net debt/(cash)

13,524

(616)

N/A

14,167

27

n/m

Source: 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. We look at the core business on a peer multiple. We use a DCF 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 16% this year and 19% next year, compared to our forecast for eServGlobal achieving an EBITDA margin of 0.2% in FY16e and 6.1% in FY17e. We apply an EV/sales multiple of 0.9x FY16e revenues (a discount of 50% to peers to reflect the profitability profile), which is equivalent to an EV/EBITDA multiple of 13.7x FY17e and results in an enterprise value of A$26.9m (2.42p per share).

Exhibit 7: Mobile software companies: valuation and financial performance

EV/sales

EV/EBITDA

P/E

EBITDA margin

Revenue growth

FY16e

FY17e

FY16e

FY17e

FY16e

FY17e

FY15

FY16e

FY17e

FY15

FY16e

FY17e

Comptel

2.4

2.1

13.4

11.6

37.0

27.4

15.6%

17.6%

18.5%

14.0%

10.8%

10.6%

Evolving Systems

1.9

1.6

6.6

4.6

14.0

9.8

19.2%

28.4%

35.7%

-13.8%

6.7%

13.9%

Redknee

1.0

0.9

16.1

5.2

N/A

10.9

10.6%

6.1%

16.7%

-13.6%

-18.1%

11.5%

Synchronoss

2.9

2.5

8.5

7.2

17.6

14.9

26.2%

34.0%

34.1%

26.6%

16.2%

17.7%

Verifone Systems

1.2

1.2

7.4

7.8

10.0

9.7

13.8%

16.0%

15.1%

6.9%

2.3%

0.9%

Average

1.9

1.7

10.4

7.3

14.2

14.5

17.1%

20.4%

24.0%

4.0%

3.6%

10.9%

Median

1.9

1.6

8.5

7.2

14.0

10.9

15.6%

17.6%

18.5%

6.9%

6.7%

11.5%

Source: Bloomberg. Note: Priced as at 2 September 2016.

HomeSend

The book value of eServGlobal’s stake on inception was A$31.1m, implying a book value for the JV of A$89m. At the end of H116 the book value of eServGlobal’s stake was A$27.6m, reflecting the losses generated by the JV to that point as well as the additional investment made in FY15. In September 2015, the company commissioned a DCF valuation of the JV. Using a WACC of 13% and a 20% discount to reflect its minority stake, eServGlobal’s share in the enterprise value of the JV was valued at €18.78m/A$29.9m, up from €16.8m/A$24.9m at the inception of the JV. This implies an enterprise value of €67m for the JV, or A$100m at current exchange rates.

We have constructed a DCF that assumes that HomeSend grows its share to 2% of the global remittance market over the next 10 years, earning 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 FY18 and ultimately achieves operating margins of 16%. Based on working capital/sales reducing down to 3% and capex/sales to 2% over the period, and using a WACC of 13% with a long-term growth rate of 2%, we value the JV at A$300m, of which eServGlobal’s share at a 20% discount would be worth A$84m. This assumes that sufficient working capital is available until break-even is reached. At such an early stage in the life of the JV, there are obviously many assumptions underlying this calculation. In the table below, we provide a sensitivity analysis that shows how this value changes depending on market share and gross margins assumptions.

Exhibit 8: Sensitivity analysis

Scenario

Value of eServ's share (A$m)*

Per share (p)

Base case

83.9

7.58

Gain 1% of market

28.1

2.53

Gain 3% of market

118.8

10.73

Gross margin 30%

157.6

14.23

Gross margin 15%

42.3

3.82

Source: Edison Investment Research. Note: *With 20% discount applied to reflect minority stake.

As a cross-check, we have looked at the financial and valuation metrics for companies involved in the remittances market. Western Union and MoneyGram are well established MTOs with large agent networks and wide geographic coverage. Earthport has developed a bulk cross-border remittances platform and is yet to break even. PayPoint operates bill payment and other payment-related services across its network of retailers. Using the base case valuation, for FY17 the JV valuation equates to an EV/sales multiple of 6.4x. Assuming that the JV’s profitability ramps up from FY18, EV multiples fall to 1.2x FY19e sales and 8.9x FY19e EBITDA, much more in line with FY17 peer group multiples.

Exhibit 9: Remittance companies: valuation and financial performance

EV/sales

EV/EBITDA

P/E

EBITDA margin

Revenue growth

FY16e

FY17e

FY16e

FY17e

FY16e

FY17e

FY15

FY16e

FY17e

FY15

FY16e

FY17e

Earthport

1.6

1.2

N/A

N/A

N/A

N/A

-14.4%

-26.7%

-3.6%

78.1%

19.7%

33.4%

MoneyGram Intl

0.8

0.7

4.6

4.3

9.1

7.2

16.9%

16.7%

16.7%

-1.4%

6.9%

6.7%

PayPoint

5.2

5.2

10.4

10.0

16.3

15.5

45.4%

50.1%

51.7%

0.4%

-3.3%

0.8%

Western Union

2.3

2.2

9.1

8.9

13.3

12.5

25.2%

25.1%

25.1%

-2.2%

-0.4%

2.1%

Average

2.5

2.3

8.0

7.7

12.9

11.7

18.3%

16.3%

22.5%

18.7%

5.7%

10.8%

Median

2.0

1.7

6.8

6.6

11.2

9.8

21.1%

20.9%

20.9%

-0.5%

3.2%

4.4%

Source: Bloomberg. Note: Priced as at 2 September 2016.

Sum-of-the-parts valuation

In the table below, we show the range of valuations for the group based on using peer multiples for the core business and three different valuations for HomeSend: DCF, book value and the most recent independent valuation.

Clearly, if the HomeSend JV manages to achieve growth in market share to 2%, the share is undervalued. To close this valuation gap, it will be crucial to see operational metrics from the joint venture to monitor its progress.

Based on our sensitivity analysis in Exhibit 8, achieving a 1% higher or lower share of the international remittances market over a 10-year period (keeping the gross margin at 20%) would change the valuation to 13.7p or 5.5p. Keeping market share at 2% but varying the long-term gross margin up to 30% or down to 15% would take the valuation up to 17.2p or down to 6.8p.

Exhibit 10: Sum-of-the-parts valuation

EV (A$m)

Assumption

EV (A$m)

Assumption

EV (A$m)

Assumption

Core business

26.9

0.9x FY16e sales

26.9

0.9x FY16e sales

26.9

0.9x FY16e sales

HomeSend

83.9

DCF, 20% discount

27.6

Book value end H116

27.9

Independent valuation (Sept 15)

Net debt

(19.8)

At end H116

(19.8)

At end H116

(19.8)

At end H116

Proceeds

18.4

18.4

18.4

Debt to equity

7.5

7.5

7.5

Group equity value

116.9

60.6

60.8

Per share (p)

10.55

5.47

5.49

Current share price (p)

6.0

6.0

6.0

Upside/(downside)

76%

-9%

-8%

Source: Edison Investment Research

Exhibit 11: 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)

(1,425)

0

Share-based payments

(261)

(624)

(456)

(438)

(54)

(100)

(300)

Operating Profit

(8,862)

(14,386)

4,881

30,284

(25,062)

(4,561)

(1,736)

Income from associate

0

0

0

(2,275)

(3,831)

(4,605)

(2,977)

Net Interest

164

(1,016)

(386)

(254)

(1,356)

(2,620)

(1,790)

Profit Before Tax (norm)

 

 

(8,437)

(8,293)

(1,046)

(542)

(17,656)

(10,261)

(6,202)

Profit Before Tax (FRS 3)

 

 

(8,698)

(15,402)

4,495

27,755

(30,249)

(11,786)

(6,502)

Tax

(560)

(187)

5,879

(13,515)

(2,125)

2,357

1,300

Profit After Tax (norm)

(8,997)

(5,805)

(732)

(379)

(14,125)

(8,209)

(4,962)

Profit After Tax (FRS3)

(9,258)

(15,589)

10,374

14,240

(32,374)

(9,429)

(5,202)

Average Number of Shares Outstanding (m)

196.8

196.8

241.1

253.1

264.0

366.6

640.2

EPS - normalised (c)

 

 

(4.59)

(3.01)

(0.36)

(0.20)

(5.41)

(2.27)

(0.80)

EPS - FRS 3 (c)

 

 

(4.73)

(7.98)

4.25

5.57

(12.33)

(2.61)

(0.83)

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

32,867

28,090

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

27,844

24,867

Current Assets

 

 

50,814

18,136

38,855

30,761

34,895

40,066

42,878

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

13,479

14,426

Other

 

 

90

90

12,026

98

5,450

317

317

Current Liabilities

 

 

(40,856)

(12,934)

(15,082)

(18,033)

(25,520)

(19,315)

(20,673)

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)

0

0

Long Term Liabilities

 

 

(1,175)

(6,431)

(749)

(865)

(19,532)

(13,806)

(15,395)

Long term borrowings

0

(6,000)

0

0

(16,531)

(12,863)

(14,452)

Other long term liabilities

(1,175)

(431)

(749)

(865)

(3,001)

(943)

(943)

Net Assets

 

 

28,803

14,989

37,154

55,070

32,359

39,271

34,228

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

14,479

0

Dividends

(23,910)

(111)

0

(146)

0

0

0

Net Cash Flow

(64,691)

465

5,315

(1,230)

(14,257)

16,974

(643)

Opening net debt/(cash)

 

 

(60,820)

3,871

3,406

(1,909)

(679)

14,555

(616)

HP finance leases initiated

0

0

0

0

0

0

0

Other

0

0

0

0

977

1,803

0

Closing net debt/(cash)

 

 

3,871

3,406

(1,909)

(679)

14,555

(616)

27

Source: eServGlobal accounts, Edison Investment Research

Contact details

Revenue by geography

eServGlobal
Suite 5
30 Florence Street
Newstead
Brisbane
4006
Australia
www.eservglobal.com

Contact details

eServGlobal
Suite 5
30 Florence Street
Newstead
Brisbane
4006
Australia
www.eservglobal.com

Revenue by geography

Management team

Executive Chairman: John Conoley

COO: Paolo Gagliardi

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.

Paolo has been chief delivery officer of eServGlobal since 2013, and was appointed COO with effect from the start of September 2015. He has more than 20 years' international experience in directing complex, multi-million euro, end-to-end projects in the ICT industry. Paolo was regional director of technology for Vodafone and VP of managed services for Bharti, delivering managed VAS solutions to Bharti Group mobile operators in emerging markets.

CTO: James Hume

VP Finance: Peter Green

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.

Peter was appointed VP finance in 2015, after five years as Group financial controller. Peter’s focus is to improve the quality of financial information provided to the management team and board and also to improve management of working capital and cash flow. Peter has extensive experience across of variety of industries, including roles at Standard Telephones and Cable, Nabisco, Thorn EMI, Defence Research Agency, National Grid and British Gas. More recently, Peter held the role of divisional financial controller at Tetra Pak and EMEA financial controller at Borland Software.

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.

COO: Paolo Gagliardi

Paolo has been chief delivery officer of eServGlobal since 2013, and was appointed COO with effect from the start of September 2015. He has more than 20 years' international experience in directing complex, multi-million euro, end-to-end projects in the ICT industry. Paolo was regional director of technology for Vodafone and VP of managed services for Bharti, delivering managed VAS solutions to Bharti Group mobile operators in emerging markets.

CTO: 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.

VP Finance: Peter Green

Peter was appointed VP finance in 2015, after five years as Group financial controller. Peter’s focus is to improve the quality of financial information provided to the management team and board and also to improve management of working capital and cash flow. Peter has extensive experience across of variety of industries, including roles at Standard Telephones and Cable, Nabisco, Thorn EMI, Defence Research Agency, National Grid and British Gas. More recently, Peter held the role of divisional financial controller at Tetra Pak and EMEA financial controller at Borland Software.

Principal shareholders

(%)

Henderson Global Investors

24.8

Legal & General Investment Management

15.6

Commonwealth Bank of Australia

6.4

Acorn Capital

5.1

Blue Lake Partners

5.0

Companies named in this report

Earthport (LON: EPO), Moneygram International (NASDAQ: MGI), PayPoint (LON: PAY), Western Union (NYSE: WU)

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. 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

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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