Investors looking for the thrill of buying a “blue-sky” stock will find eServGlobal (ESV) a tempting proposition, as its joint venture could become the “Western Union” in the mobile remittance space.
MasterCard paid €9 million ($13.6 million) to the London-based but ASX-listed eServGlobal for a majority stake in a joint venture, called HomeSend, which allows mobile phone subscribers to transfer cash to other mobile phone subscribers around the world.
The World Bank estimates the global remittance to developing countries is worth around $US500 billion, with a large section of the population in these countries having mobile phones but limited or no access to banking facilities.
Gaining access to this part of the market is the key motivation behind MasterCard’s decision to buy a 55% stake in HomeSend, leaving eServeGlobal with a 35% stake and Brussels-based telco BICS with the remainder.
The biggest risk to eServGlobal’s valuation is the market penetration of HomeSend, and forecasting adoption rates for new services and products is far more an art than a science.
However, I suspect that HomeSend can achieve similar scale to US-listed remittance giant Western Union, which recorded revenues of $US5.5 billion in its latest annual accounts. If that is true, that would imply roughly a 10% market share for HomeSend, which sounds achievable if MasterCard puts its best foot forward to drive adoption of the service.
The other challenge is trying to predict when HomeSend might be able to achieve this goal. I am expecting it to take the better part of four years, with HomeSend making a 0.2% dent in the market by the end of eServGlobal’s 2015 financial year which ends in October. This would translate to little more than breakeven for the group.
But 2016 is when things start to get exciting. If HomeSend can achieve a 1.8% penetration rate, it would translate to $US9 billion in transaction value, with HomeSend charging a 1.5% hub fee. eServGlobal’s share of the spoils (net of cost) would equate to more than $US20 million for that financial year.
The steady ramp-up in earnings from HomeSend would theoretically give eServGlobal a discounted cash flow valuation of $1.95 a share compared to its current share price of around 80 cents. But that’s the “blue sky” component of the stock’s value. The fact is, the market will be loath to pay anything close to that on a one-year investment horizon.
Indeed, the crazy valuations given to internet stocks during the tech boom were justified based on an impressive long-term increase to future profits. The funny thing is that some of these tech darlings did go on to meet high expectations, but that didn’t save their share prices from taking a savage beating during the “tech bust”.
This is why it is important to inject some sense of realism to any “blue sky” stock, including eServGlobal. I use a price-earnings (P/E) multiple of 30 times on my 2014-15 numbers as a reality check, and the valuation falls to 74 cents. That is too conservative as it doesn’t account for the expected 233% uplift in earnings per share in 2015-16 when HomeSend starts to hit its straps.
From that perspective, I think blending the valuations is appropriate and that takes my 12-month price target on eServGlobal to $1.35.
Like all “blue sky” punts, this isn’t for the faint-hearted. Just about anything and everything can go wrong. But it brings some comfort to know that eServGlobal isn’t likely to go under if HomeSend turns out to be a big disappointment.
The company has an existing service called Mobile Money that has just about turned a profit. The service allows mobile customers in underdeveloped economies, such as the Middle East, to receive their salary and pay bills using their mobile phones.
Mobile Money is expected to generate a pre-tax profit of around $2.5 million this financial year. If I stripped out the HomeSend business, the stock should still be worth around 50 cents a share.
To see eServGlobal’s forecasts and financial summary, click here.