Giving up on Global Health and eServGlobal

There seems to be little scope for a market re-rating of Global Health, while eServGlobal faces serious execution risks.

Global Health (GLH)

The healthcare software developer seems stuck in a holding pattern. We have given the firm plenty of time to demonstrate that it can gain scale and attain a more diverse range of customers, but its most recent results show that this may be too much to ask.

Licence and subscription sales are falling short of the “recurring revenue” promise that so often attracts investors to these types of stocks. With weak sales growth weighing on profit margins, there seems little scope for a market re-rating of the stock from its current level of seven times the midpoint of FY16 earnings guidance (3.25c per share). Indeed, GLH’s reported net profit has receded since FY13, and these figures are still arguably flattered by the firm’s accounting policies.

When we first recommended GLH (see Global Health hunts cloud-based growth, August 18, 2014), our investment thesis pointed to the opportunity for the firm to sell eHealth software to international markets. But GLH seems to have made few inroads on both this front and its goals to monetise the “worried well” and sell directly to patients.

In July 2015, management sought to stoke growth by acquiring a medical software business that would expand its product set and add new clients. In paying up to $500,000, GLH claimed at the time that the purchase would boost earnings per share, but with the firm remaining silent on how this acquisition has performed since, it’s hard for us to deem this deal a winner.

Global Health remains embroiled in an ugly contract dispute with the South Australian government. The drama shows that recurring revenues can be much less sticky than investors think.

Considering that in happier times, SA represented as much as 20 per cent of GLH’s revenue, we can understand management pursuing the government for what it views as unfair use of a legacy product. But in any event, this dispute is a disruptive distraction for a small company that can ill afford it. A trial date has yet to be set, and we have little interest in sticking with the company while it takes on “City Hall”.

Our recommendation to sell 12 months ago has proven to be the right call. Global Health remains a highly speculative stock with real upside if management can execute its plan, but in the absence of evidence of meaningful growth, we reiterate our sell rating and cease coverage of GLH with our final valuation unchanged at 20c per share.

eServGlobal (ESV)

The provider of mobile payment technology seems to have lost control of its destiny.

Its established core business, Mobile Money, sells software to mobile network operators and financial service providers to support recharge and mobile financial services. Mobile Money is suffering cost blowouts and revenue weakness as the firm has struggled to seal important deals.

ESV announced cost saving initiatives in a trading update on June 4, 2015, which could bring down overheads by around 30 per cent, but this is in the face of serious execution risks given the emerging markets in which the firm operates.

Although the opportunity to help underbanked emerging market customers receive salary and pay bills is undoubtedly large, it is not clear that ESV is making market share headway against well-resourced competitors like TelePin, Mahindra Comviva, Utiba and Fundamo.

Earnings before interest, tax, depreciation and amortisation (EBITDA) deteriorated from a gain of $2.6 million in the year ending October 31, 2014 to a loss of $3.1m in the six months to April 30, 2015. The firm’s most recent trading update, on October 12, 2015, sees the losses accelerating.

Given the challenges ESV seems to face in growing revenue, we’re reluctant to extend our patience regarding a turnaround, and suspect the firm’s full-year results later this month could reveal a further downgrade.

Investors have pinned their hopes for growth on HomeSend, ESV’s remittance start-up joint venture (JV) with MasterCard and Belgacom. HomeSend aims to cut the cost of remitting small amounts of money to emerging nations. This is a business in which Western Union has enjoyed wide margins for a long time.

HomeSend’s market opportunity is clearly large, and the quality of its technology has been recognised by market players. But the young business is still loss-making, and MasterCard is not making life easy for its junior partner ESV, which owns 35 per cent of HomeSend.

HomeSend needs €10m of fresh capital to pay for more marketing and a new data centre. To avoid dilution of its 35 per cent holding, ESV had to tip in €875,000 in October, with another tranche of €2.625m due in April 2016. If ESV fails to make the April payment, its JV partners reserve the right to acquire shares in HomeSend such that ESV could suffer serious dilution.

ESV has sought a loan of up to £5m from its majority shareholder, Henderson Global Investors. This is payable at an effective rate of 9.6 per cent per annum and also grants the lender options that represent 15 per cent of ESV’s currently issued share capital.

This capital structure seems onerous, particularly in tandem with ESV’s other debt facility with Henderson that charges 15 per cent per annum. We see potential for HomeSend’s continued capital requirements to intensify the pressure on ESV’s fragile balance sheet.

Pressure is closing in on ESV from multiple fronts. We see a real risk that shareholders will continue to suffer at the hands of well-resourced competitors and hard-bargaining partners. Therefore we downgrade our ESV recommendation to sell, and will cease coverage of the stock with a final valuation of 10c per share for the core business — assigning no value for its HomeSend stake.

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