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.

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