Transmission interrupted at eServGlobal

One of the best ways to destroy a company's share price is to announce the departure of senior management without any background information or supporting reasons.

This is exactly what eServGlobal (ESV) has done. On the March 2 this year it was announced that chief executive Paolo Montessori was stepping down with immediate effect. Ever since, the share price has been in free-fall, closing today at $0.26 or at a market capitalisation of approximately $70m.

At the time of departure the company announced that chief operating officer and board member Steven Blundell would be the care-taker chief executive while they searched for a successor.

Today ESV announced that former non-executive director John Conoley will become executive chairman. It is proposed that he will work closely with chief operating officer Steve Blundell, and as such the company will no longer be searching for a new external chief executive.

Despite the lack of explanation, management has tried to argue that there are no new major problems or changes with the business model. The market reaction clearly suggests that ESV needs to provide more evidence that things are on track with both the core mobile payments business and HomeSend, the Mastercard backed international remittance play.

Earlier last year the expectation was that the existing business would grow revenues at 20 per cent per annum. This expectation has since been revised down to closer to 10 per cent with continued margin growth. If this downward revision is the major reason for Paolo's departure then the market has most likely overreacted. 

Existing business – Mobile Money

The core mobile payments business Mobile Money has been running for 30 years, with it now growing sustainably after a tough patch through the GFC.

They provide mobile money software solutions with over 250m subscribers. For example, it enables customers in developing nations to receive their salary and pay bills using their mobile phones.

The company's strategic vision has been to provide stability and growth from the core business as the HomeSend opportunity is pursued.

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

HomeSend

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 are a global challenge, with a general agreement that the average transaction cost needs to be reduced from an average of 10 per cent to 5 per cent.

ESV's HomeSend offering has a transaction cost from 4.5-6.5 per cent with the company taking 1.5 per cent and then 1.5-2.5 per cent costs at either end for the sender and receiver commissions. If HomeSend is a success the opportunity is massive with a market size of over $600bn.

The unbanked population is approximately 2.bn. Many of the unbanked people – who do have mobile phones – are in developed nations and need to send money home (to developing nations), 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 1.2bn people, with expectations that will increase as the network is developed.

Partners/industry players

MasterCard's network of more than 24,000 financial institutions and 1.8bn 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 per cent contains large variations between the cost of developed corridors and others, such as Ghana to Nigeria, which cost about 40 per cent.

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.

Where to from here?

As has always been the case, ESV is a company with very high risk. This has only increased with the uncertainty surrounding the management restructure.

There is continuing regulation risk and also the issue that the company operates in many unstable developing nations.

It is too early to determine how successful HomeSend will be, but at the current share price it is a free option. The market opportunity is clearly very large, and if it is a success it will promote an ESV share price of many multiples of today's levels.

Valuation

We have revised our revenue growth forecasts and margin growth, reducing our valuation of Mobile Money from $0.48 to $0.35. It needs to be highlighted that this still assumes 2015 revenue growth of 10 per cent. But increased competition has meant the rate of margin growth is not likely to be as high as we had previously assumed.

HomeSend remains very difficult to value and, with the uncertainty surrounding the management changes, we have conservatively reduced this valuation from $0.30 to $0.20.

The combined valuation of $0.55 is well above current levels. But despite this valuation support we can't recommend the stock as a “buy”with so much uncertainty surrounding recent events. We  maintain our “hold” recommendation.