Eserve Global: a bargain share powered by Mastercard

I’ve found what I think could be a bargain share, Eserve Global (AIM: ESG). It’s price has fallen approximately 90% over the past couple of years, it’s unloved, currently loss-making and therefore ignored by most private investors. Thus, it has a ‘sucker stock’ rating from Stockopedia.

So far, so bad.

The good news is that FinnCap’s Lorne Daniel, an analyst who actually deserves that title, believes it is worth multiples of its current price. Okay, he is with the house broker but I genuinely value his views. Moreover, he tends to have a conservative bias on valuations, which means when he gets excited about the prospects for a stock I tend to take note.

In his latest note he puts a 20p price target on the stock, which is currently only 5.95p.

The main reason for investing is simply that  the Homesend joint venture, of which Eserve holds 35.69% (to Mastercard’s 64.31%) is set to become a major platform for cross-border transactions by global banks.

Cross-border payments is a  huge market and Lorne believes the HomeSend platform is applicable to around a tenth of it, making it a US$22 trillion market.

If HomeSend captures only a small fraction of that, commission payments to eserve will run into tens of millions of pounds. Logically, Mastercard won’t want to have a minority holder in the JV and will buy Eserve Global out.

This is clearly what Lorne believes, as stated in a note published on 27 September, 2018: “Success and significant earnings are now imminent, and we expect that Mastercard, a $220bn market cap global financial services giant, will be keen to secure the operation in totality.”

How much is Mastercard likely to pay? Well, Lorne Daniel states: “Mastercard shares currently trade on a P/E of 20.7x its forecast 2021 earnings. We expect HomeSend to deliver $45m of earnings in that year; worth $930m to Mastercard at present. It is entirely conceivable that Mastercard would value eServGlobal’s 35.7% stake at over $300m (£230m).”

Eserve also has its Paymobile operations valued at around £10m, which are possibly going to be sold before too long.

I’ve therefore taken a small position into what I believe could be a profitable investment over the next  6-12 months.

Of course, it’s not without risks. Mastercard could decide to be miserly about the takeout price, or it could take longer than expected to build up the transaction volumes via banks on the HomeSend platform. Yet, Mastercard appears fully committed to marketing this platform.

Nevertheless, I’d advise anyone thinking of investing to do some research. I can and do make mistakes, especially about the quality of management. Still, the Executive Chairman, John Conoley came across very well in an excellent interview with PI World.

The writer holds stock in Eserve Global.

Analyst very positive on Seeing Machines

As the UK was voting to leave the EU I was speaking with Lorne Daniel, the analyst at house broker FinnCap who covers Seeing Machines.

It was Lorne who first opened my eyes to the enormous potential of this AIM-listed company.

Like me, he’s very much looking forward to the automotive spin-off, expected to raise up to US$50m, perhaps in two tranches. Interestingly, he feels confident that SEE will maintain a high stake, around 75% in the initial funding round, perhaps dropping to around 50% in the second round.

This is what he said: “In the initial round, I was thinking Seeing Machines would have 75% and the investors will have about 25%. Then it would drop to around 50% for the second round.  Nothing has been confirmed yet but that was my thinking.

“I guess we will find out but as I understand it they need around US$50m. So, however that comes in, (for example, $25m and then $25m), I would be disappointed if they didn’t value their own IP at US$50m plus. I think it is worth, far more than that by any sort of calculation.”

“But to be fair, these initial investors are likely to be industry giants taking a big stake and they will want their cut. That’s fine.

“The template is Mobileye which has a US$8bn valuation on the US market with revenue of just US$240m. If Seeing Machines’ automotive spin off gets anywhere near that rating nobody will worry what that initial valuation was.”

Now my belief is that GM Ventures is the cornerstone investor and that VS Industries is investor number two. I don’t know who the third might be but I’m hoping it may be Intel. 

We shouldn’t have to wait too much longer to find out, given that Seeing Machines announced that lead investor had signed a term sheet on May 16. 

Fleet

Not only is SEE getting 15% of the growing royalty stream and monthly revenues  from sales of its product by Caterpillar, but it involves virtually no cost. Moreover, as soon as a telematics deal gets announced, and we already have MOUs, this will have forecasts upgraded substantially. This is turn should lead to a significant price rise and a further re-rerating. 

It’s significant that Seeing Machines is now leveraging insurers and telematics companies to roll out its technology in a cost-effective way. 

As it starts to grow you can also expect momentum traders and larger funds to start getting interested in the company, which would drive the price up further.

Of course, all this supposes that things go smoothly, which is never the case in business. 

Price target

Lorne Daniel currently has a price target of 12p on SEE and I’d expect that to rise following either the launch of the auto-spin-off or a significant fleet contract. 

Takeover

I’d be concerned that as the company is so undervalued, particularly given the limited downside and the virtually unlimited upside, an attempt to take it over on the cheap can’t be ruled out. This could be a direct competitor, or possibly a partner on the telematics front, or even Mobileye whose technology offering would be significantly enhanced.

In fact, I could reel off half a dozen companies that might logically seek strategic advantage by buying SEE.

However, the auto spin-off (by providing independent valuation of its IP far in excess of its current market value) will make this eventuality less likely. Certainly, any company then wishing to takeover Seeing Machines will have to pay a significant sum. I personally don’t think US$1bn would be an unrealistic sum to expect at that stage.

As the auto spin-off is very likely to be completed this side of Christmas (key management should definitely be in place by then), I’m prepared to stick my neck out and say that within 18 months I expect SEE to have a valuation of between 50-75p. That’s quite a rise from 3.25p at the time of writing.

Of course, you should always do your own research before investing.

The writer holds stock in Seeing Machines.