eServGlobal: More to prove with HomeSend

Despite blue-sky potential, we are taking a more cautious view towards the company as its key growth business – a joint venture with MasterCard – is in the early stages.

HomeSend opportunity

eServGlobal (ESV) has ambitious plans of providing a disruptive mobile technology that is capable of dramatically reducing the cost of global remittance to developing nations such as India and Africa.

The current high industry transaction costs were again raised at the G20 meeting on Friday, with a general agreement that the average transaction cost needs to be reduced from an average of 10% to 5%.

ESV’s HomeSend offering has a transaction cost from 4.5-6.5% with the company taking 1.5% and then 1.5-2.5% costs at either end for the sender and receiver commissions. If HomeSend is a success the opportunity is massive with a market size of around $500 billion.

The unbanked population is approximately 2.5 billion. Many of the unbanked people working in developed nations who need to send money home (to developing nations) do have mobile phones, and this is the gap in the market that the HomeSend joint venture is aiming to target.

Specifically the technology enables end-customers to transfer money internationally to and from mobile money accounts, payment cards, bank accounts or cash outlets. It is currently connected to 1.2 billion people, with expectations that will increase as the network is developed.

Volatile share price

The share price hit a high of $1.09 in February this year with MasterCard paying $13.6 million for a 55% stake in HomeSend, with ESV holding 35% and Brussels based BICS (Belgacom International Carrier Services) having the remaining 10%. eServGlobal is a dual listing, with a more liquid listing in London.

Since this time the share price has drifted back, with a lack of news and the market working out that the new technology will take some time to setup. It is also very difficult to determine what market share HomeSend can achieve and how to value it.

Recently  the share price spiked again due to a webcast from the joint venture partners on October 16. Although there wasn’t a lot of new news, confidence can be taken from the commitment shown by MasterCard and why the opportunity is strategically important for them. Specifically MasterCard’s emerging market strategy is focused on “Growing the pie” – referring to the 85% of transactions that remain cash or cheque.

Partners/Industry players

MasterCard’s network of more than 24,000 financial institutions and 1.8 billion cardholders provides a huge opportunity for the joint venture due to the ability for them to become potential senders and receivers via the HomeSend hub.

Using traditional methods, the remittance market is currently dominated by Western Union and MoneyGram. Their average commission of about 8.5% contains large variations between the cost of developed corridors and others such as Ghana to Nigeria which cost about 40%.

MoneyGram has already signed up with HomeSend with a full launch due in the near term. Western Union has an existing relationship with MasterCard, and it will be a very material share price catalyst if they also sign up to HomeSend.

The pipeline of partners is building with further Money Transfer Organizations (MTOs) and financial institutions likely to see value in the low cost efficient platform. Others who have already signed up include WorldRemit, XpressMoney, mHIT’s, and Brastel Remit.

Existing business – mobile Money

The company has been running for 30 years, with its existing Mobile Money business now growing sustainably after a tough patch through the GFC due to increased competition.

They provide mobile money software solutions with over 250 million subscribers. For example, it enables customers in developing nations to receive their salary and pay bills using their mobile phones. Managing director Paolo Montessori has done an excellent job getting the core business back to profitability while also focusing on the remittance opportunity.

This core business is complementary with Homesend, as evidenced by the fact that when the mobile money solution has been deployed the first services to be introduced are remittance services.

There are four major competitors in TelePin, Utiba, Tech Mahindra, Fundamo. Combined with ESV they control over 80% of mobile money deployments.

Valuation

The company has an October year-end, with full-year results due to be released in December. The valuation of the core mobile business is relatively simple, with our $0.48 valuation assuming 20% near term growth and margin gains from scale.

HomeSend on the other hand is anything but simple to value. It really is too early to accurately forecast earnings and come up with a valuation.

The first step will be to get to break-even at some stage in 2015. At this point, the company has stated that they will increase the amount of updates relating to transaction volumes. We estimate approximately $25 million a month of transactions are required for HomeSend to break-even.

It also needs to be considered that the company operates in an industry with very high risk due to high competition and a constant battle to upgrade technology.

Our $0.30 per share valuation for HomeSend is a reflection of this risk and also the uncertainty in expanding the network. If all goes to plan, it will be break-even next year with very high earnings growth to flow through in 2016. This would make HomeSend worth over $1.00 per share, with a lot of blue-sky potential.

We have a "hold" recommendation for eServGlobal, with a $0.78 valuation. Our cautious stance is due to the very high risk nature of the sector and the early stages of the HomeSend roll-out.

To see eServGlobal's forecasts and financial summary, click here.