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eServGlobal — Restructuring ongoing

eServGlobal — Restructuring ongoing

Slower than expected trading combined with continued restructuring of the business in H117 has resulted in a reduction in our forecasts for FY17. Management is confident that the pipeline has strengthened and should support a pick-up in revenues in H217. The HomeSend joint venture (JV) has extended its application to the cross-border bank payments market, which should support its target to break even in CY17 and drive growth in the value of the JV.

Written by

Katherine Thompson

Director

eServGlobal

Restructuring ongoing

H117 results

Software & comp services

5 July 2017

Price

6.63p

Market cap

£42m

A$1.69:€1.14:£1

Net debt (A$m) at end H117

10.6

Shares in issue

640.2m

Free float

96%

Code

ESG

Primary exchange

AIM

Secondary exchange

ASX

Share price performance

%

1m

3m

12m

Abs

15.2

15.2

51.4

Rel (local)

18.4

14.4

32.6

52-week high/low

8.2p

4.2p

Business description

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

Next events

FY17 results

End December 2017

Analysts

Katherine Thompson

+44 (0)20 3077 5730

Dan Ridsdale

+44 (0)20 3077 5729

eServGlobal is a research client of Edison Investment Research Limited

Slower than expected trading combined with continued restructuring of the business in H117 has resulted in a reduction in our forecasts for FY17. Management is confident that the pipeline has strengthened and should support a pick-up in revenues in H217. The HomeSend joint venture (JV) has extended its application to the cross-border bank payments market, which should support its target to break even in CY17 and drive growth in the value of the JV.

Year end

Revenue (A$m)

EBITDA*
(A$m)

EPS*
(A$)

DPS
(A$)

P/E
(x)

EV/EBITDA
(x)

10/14

31.3

2.6

(0.20)

0.0

N/A

26.5

10/15

25.9

(10.4)

(5.41)

0.0

N/A

N/A

10/16

21.6

(7.0)

(3.88)

0.0

N/A

N/A

10/17e

18.2

(6.1)

(2.01)

0.0

N/A

N/A

12/17e**

22.3

(4.8)

(2.08)

0.0

N/A

N/A

Note: *PBT and EBITDA are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **14 month period to 31 December 2017

H117 trading disappoints

eServGlobal saw weaker than expected trading in H117 due to delays in a new and an existing contract, resulting in a 30% decline in revenues y-o-y. However, management is confident that it has a strong pipeline and therefore expects a material step-up in revenues in H217. Management has been restructuring the business over the past two years and continues to assess historical receivable balances – taking a more prudent approach has resulted in further WIP and receivable write-downs totalling A$4.3m in H117. The company extended its debt by £2.5m/A$4.2m post period end to fund working capital and further restructuring.

HomeSend expands addressable market

While current volumes processed by the HomeSend JV are predominantly for remittances, the JV has made inroads into the cross-border banking payments market. It is rolling its service out to KEB Hana and has signed several other banks to use its service. This opens up an addressable market that is multiple times larger than the remittances market. Management expects the value of the JV to grow through the year as volumes processed by the platform ramp up.

Changes to forecasts and valuation

We have revised our forecasts for FY17 to reflect the low end of management’s revenue expectations and have factored in cost guidance. This results in a cut to revenues of 15.8% and a small EBITDA profit moving to an adjusted loss of A$6.1m. While progress in the core business has been slower than hoped for, the HomeSend JV continues to make good progress and we expect adoption of the service for cross-border banking payments to drive volumes in the medium term. The current share price appears to be valuing the HomeSend JV based only on its opportunity in the remittances market, and the core business at a discount to mobile software peers. Evidence of progress in the banking sector for HomeSend as well as pipeline conversion in the core business should drive upside to the share price.

H117 results review

eServGlobal saw delays in signing new contracts in H117, resulting in a 30% year-on-year drop in revenues to A$5.86m. Writing off A$1.51m of WIP balances resulted in a gross loss of A$1.35m – excluding the write-off, the company generated a gross profit of A$0.16m (gross margin 3%). The company reported an EBITDA loss of A$11.87m. We calculate an adjusted EBITDA that excludes the share of losses from the HomeSend JV (A$1.92m), currency gains (A$0.32) and write-offs of receivables (A$2.78m) and WIP (A$1.51m). This is lower than a year ago, despite significantly lower revenues, reflecting the results of the company’s cost cutting (clean opex excluding depreciation and amortisation was A$6.1m in H117 vs A$7.0m in H116). The company ended H117 with cash of A$2.86m (down from A$9.38m at the end of FY16) and debt of A$13.46m, resulting in net debt of A$10.60m. Post period end, the company negotiated an additional £2.5m/A$4.2m in debt from its existing lenders, Lombard Odier Asset Management, on the same terms as the original debt (ie due for repayment in June 2019).

Exhibit 1: Half-year results highlights

A$m

H116

H117

y-o-y

Revenues

8.36

5.86

(29.9)

Normalised gross profit

0.45

0.16

(64.9)

Normalised gross margin (%)

5.4

2.7

(2.7)

EBITDA

(8.81)

(11.87)

25.8

EBITDA margin (%)

(105.3)

(202.6)

(97.3)

Normalised EBITDA

(6.56)

(5.92)

(10.8)

Normalised EBITDA margin (%)

(78.4)

(101.0)

(22.6)

Net income

(12.22)

(14.39)

15.1

Net debt

19.84

10.60

(46.6)

Source: eServGlobal, Edison Investment Research. *Excludes share-based payments, exceptional items and share of losses of associate.

Core business update

The shortfall in revenues in H117 was due to timing issues relating to one new contract and one existing contract. Despite this, the company is confident that it has generated an improved pipeline: the qualified pipeline was worth €39m at the end of H117 and is geographically diversified outside of the Middle East.

eServGlobal signed up an African channel partner last year; however, this relationship has not worked out as originally planned. The company has written off all revenue recognised in FY16, accounting for €1.8m/A$2.6m of the receivables write-down. The company believes opportunities still exist in the region and intends to pursue them in due course.

Management has focused on reducing costs in the core business, reducing the total cost base by 30% compared to one year ago.

Update on HomeSend JV

The company has provided an update on the progress of the HomeSend JV. The bulk of the JV’s current volumes are generated from remittances, ie person-to-person payments, usually from developed countries to developing countries. The JV also spent time over the course of 2016 integrating with Mastercard’s Send network and it is now the provider of Mastercard Send Cross Border (XB)’s service. This is a service that allows Mastercard bank customers to make cross-border payments via the Send network. This reduces the banks’ reliance on correspondent banks and should reduce the cost of such payments. The provision of cross-border payment services to banks expands HomeSend’s addressable market significantly: global remittances total c $575 billion per annum (source: World Bank) compared to cross-border B2B payments in the region of $160 trillion per annum (source: McKinsey).

In September 2016, HomeSend announced that KEB Hana, one of South Korea’s largest banks, had signed up to use HomeSend for cross-border remittance services. Several corridors are now live and the remaining corridors are being added. We understand that KEB is in soft launch, with limited volumes being processed to date. Assuming the testing phase proves that the system is robust, we would expect KEB to start to ramp up volumes from H217. This underpins HomeSend’s target to reach break-even during 2017. HomeSend has signed up a number of other banks to use its service and it is also exploring opportunities in the e-commerce market. Consequently, management expects the value of the JV to grow over the remainder of the year.

From a financial perspective, eServGlobal reported a share of losses of the JV of A$1.92m for H117, which compares to A$1.99m in H216 and A$2.65m in H116.

Outlook and changes to forecasts

The company had been targeting a reduction in costs to below €18m/A$26m in FY17, at which point it expected to break even. We were forecasting revenues of A$27.6m for the year with a small positive EBITDA of A$0.8m. Management now estimates that revenues could be in the range of €15-19m (A$22-28m) for the 14 months to 31 December.1 Management continues to target further cost reductions and expects costs for FY17 to be around €16.5m (A$24.3m) and for the 14 months to 31 December, around €18.5m (A$27.2m), with the potential to break even by the end of CY17.

  The company is changing its year-end to 31 December. It will report results for the 12 months to 31 October in December as well as results for the 14 months to 31 December in March 2018.

We are resetting our forecasts based on the lower end of guidance. We have assumed that revenues are spread equally across the eight-month period to 31 December 2017, so we are forecasting H217 revenues of A$12.3m. While this is 115% higher than in H117, it is 7% below the same period a year ago. We now forecast an EBITDA loss of A$6.1m for FY17 (the year to 31 October 2017) and expect net debt to reach A$9.9m by the end of FY17. We have also introduced forecasts for the 14 month period to 31 December 2017.

Exhibit 2: Changes to forecasts

A$'000

FY17e old

FY17e new

Change

y-o-y

14 months to end CY17

Revenues

27,629

18,163

(34.3%)

(15.8%)

22,264

Gross profit

12,713

5,081

(60.0%)

(16.5%)

6,721

Gross margin

46.0%

28.0%

(18.0%)

(0.2%)

30.2%

Normalised EBITDA

791

(6,071)

(867.1%)

(13.0%)

(4,769)

Normalised EBITDA margin

2.9%

(33.4%)

(36.3%)

(1.1%)

(21.4%)

Normalised EBIT

(2,599)

(9,461)

264.1%

5.8%

(8,724)

Normalised EBIT margin

(9.4%)

(52.1%)

(42.7%)

(5.6%)

(39.2%)

Reported EBIT

(2,799)

(13,621)

386.7%

(45.0%)

(12,918)

Normalised PBT

(7,272)

(15,830)

117.7%

9.7%

(16,334)

Reported PBT

(7,472)

(19,990)

167.5%

5.5%

(20,528)

Normalised net income

(6,018)

(12,864)

113.8%

9.6%

(13,301)

Reported net income

(6,178)

(20,290)

228.4%

7.5%

(20,861)

Normalised EPS

(0.94)

(2.01)

113.8%

48.2%

(2.08)

Net debt/(cash)

4,105

9,912

141.5%

315.8%

9,542

Source: Edison Investment Research.

Exhibit 3: Financial summary

A$'000s

2012

2013

2014

2015

2016

2017e

2017e*

Year end 31 October

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

28,070

31,003

31,261

25,866

21,577

18,163

22,264

Cost of Sales

(12,267)

(11,789)

(13,359)

(20,608)

(15,490)

(13,082)

(15,543)

Gross Profit

15,803

19,214

17,902

5,258

6,087

5,081

6,721

EBITDA

 

 

(1,936)

1,683

2,571

(10,449)

(6,982)

(6,071)

(4,769)

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

(7,277)

(660)

1,987

(12,469)

(10,039)

(9,461)

(8,724)

Amortisation of acquired intangibles

0

0

0

0

0

0

0

Exceptionals

(6,485)

5,997

28,735

(12,539)

(3,533)

(3,971)

(3,971)

Share-based payments

(624)

(456)

(438)

(54)

(75)

(189)

(222)

Operating Profit

(14,386)

4,881

30,284

(25,062)

(13,647)

(13,621)

(12,918)

Income from associate

0

0

(2,275)

(3,831)

(4,638)

(4,597)

(5,490)

Net Interest

(1,016)

(386)

(254)

(1,356)

(2,861)

(1,772)

(2,120)

Profit Before Tax (norm)

 

 

(8,293)

(1,046)

(542)

(17,656)

(17,538)

(15,830)

(16,334)

Profit Before Tax (FRS 3)

 

 

(15,402)

4,495

27,755

(30,249)

(21,146)

(19,990)

(20,528)

Tax

(187)

5,879

(13,515)

(2,125)

(596)

(100)

(100)

Profit After Tax (norm)

(5,805)

(732)

(379)

(14,125)

(14,030)

(12,664)

(13,067)

Profit After Tax (FRS3)

(15,589)

10,374

14,240

(32,374)

(21,742)

(20,090)

(20,628)

Average Number of Shares Outstanding (m)

196.8

241.1

253.1

264.0

366.6

640.2

640.2

EPS - normalised (c)

 

 

(3.01)

(0.36)

(0.20)

(5.41)

(3.88)

(2.01)

(2.08)

EPS - FRS 3 (c)

 

 

(7.98)

4.25

5.57

(12.33)

(5.98)

(3.17)

(3.26)

DPS (c)

0.00

0.00

0.00

0.00

0.00

0.00

0.00

Gross Margin (%)

56.3%

62.0%

57.3%

20.3%

28.2%

28.0%

30.2%

EBITDA Margin (%)

(6.9%)

5.4%

8.2%

(40.4%)

(32.4%)

(33.4%)

(21.4%)

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

(25.9%)

(2.1%)

6.4%

(48.2%)

(46.5%)

(52.1%)

(39.2%)

BALANCE SHEET

Fixed Assets

 

 

16,303

14,330

43,431

42,928

33,274

26,876

25,683

Intangible Assets

9,386

3,523

9,011

6,939

5,598

3,797

3,497

Tangible Assets

912

482

3

84

32

32

32

Other Fixed Assets

6,005

10,325

34,417

35,905

27,644

23,047

22,154

Current Assets

 

 

18,136

38,855

30,761

34,895

28,240

23,970

28,002

Stock

 

 

158

74

173

66

72

72

72

Debtors

 

 

14,094

21,846

26,811

24,403

17,976

14,680

17,994

Cash

 

 

3,794

4,909

3,679

4,976

9,375

8,401

9,118

Other

 

 

90

12,026

98

5,450

817

817

817

Current Liabilities

 

 

(12,934)

(15,082)

(18,033)

(25,520)

(14,469)

(12,224)

(14,921)

Creditors

(11,665)

(11,932)

(13,010)

(22,285)

(14,189)

(11,944)

(14,641)

Taxation & social security

(69)

(150)

(2,023)

(235)

(280)

(280)

(280)

Short term borrowings

(1,200)

(3,000)

(3,000)

(3,000)

0

0

0

Long Term Liabilities

 

 

(6,431)

(749)

(865)

(19,532)

(12,649)

(19,203)

(19,551)

Long term borrowings

(6,000)

0

0

(16,531)

(11,759)

(18,313)

(18,661)

Other long term liabilities

(431)

(749)

(865)

(3,001)

(890)

(890)

(890)

Net Assets

 

 

14,989

37,154

55,070

32,359

33,823

19,067

18,827

CASH FLOW

Operating Cash Flow

 

 

(11,901)

(7,207)

(5,810)

(12,130)

(10,712)

(5,020)

(4,336)

Net Interest

(974)

(580)

(271)

(423)

(175)

(148)

(148)

Tax

(7,813)

(1,088)

2,018

(3,148)

(1,159)

(300)

(350)

Capex

(1,966)

(1,950)

(6,403)

(2,921)

(1,583)

(1,590)

(1,855)

Acquisitions/disposals

23,307

0

5,418

0

5,133

0

0

Financing

(77)

16,140

3,964

4,365

15,929

0

0

Dividends

(111)

0

(146)

0

0

(421)

(421)

Net Cash Flow

465

5,315

(1,230)

(14,257)

7,433

(7,480)

(7,110)

Opening net debt/(cash)

 

 

3,871

3,406

(1,909)

(679)

14,555

2,432

2,432

HP finance leases initiated

0

0

0

0

0

0

0

Other

0

0

0

977

(4,690)

(0)

(0)

Closing net debt/(cash)

 

 

3,406

(1,909)

(679)

14,555

2,432

9,912

9,542

Source: eServGlobal, Edison Investment Research *14 month period to 31 December 2017

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by eServGlobal and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. 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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 2017. “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.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Energy & Resources

SDX Energy — CPR results confirm South Disouq

SDX Energy has released the results of an independent resource audit on its South Disouq discovery. Gaffney, Cline & Associates has assigned gross 2C resources of 47bcf and 2.3mmbbls and a further 180bcf and 8.7mmbbls of gross prospective resources. The company is in discussion to get production as early as possible to generate cashflows and value. Elsewhere, progress is being made at NW Gemsa and Meseda that should see production increases by year end. In Morocco, a campaign of seven wells is planned and should start in the next six weeks. We are reviewing our model and will update our valuation (currently 76p/share) in time.

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