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eServGlobal – interims argue “strong outlook” & Homesend “sales expansion”, but what about the financials?

By Steve Moore | Friday 30 June 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

eServGlobal (ESG) has announced results for its half year ended 30th April 2017 including “a strong outlook for the year” for the core business and that the Homesend joint venture payment hub “is experiencing a sales expansion which it expects to become more significant across the remainder of 2017”. So why do the shares remain sub 6p, well down from more than 8p reached earlier this year?

Well, ignoring the bullish verbiage, the financials show an Australian$8.2 million increase in net debt, to A$10.6 million, on revenue almost 30% lower than in the corresponding prior year period, at A$5.9 million.

The statement notes “specific timing challenges around one new and one existing contracts” and “our channel initiative in Africa announced last year has been re-evaluated and based on experience to date, the board believes it is not the most efficient way to capitalise on new opportunities being identified. As a result, the board has decided to exit the relationship”. Not to worry though as “the quality and geographical diversity of the pipeline… provides a strong outlook for the year giving the board current visibility of a revenue range of €15.0M to €19.0M in the 14 months to December 2017”. Hmmm.

Meanwhile, on Homesend it is added “volumes are expected to be substantially supplemented by existing and new bank agreements”, that “the immediate market opportunity is much larger than previously thought” and that “the eServGlobal board expects the value of this investment to significantly increase over the remainder of the financial year”.

Sounds promising, but eServGlobal's financials remain troubling. Chairman John Conoley talks of “the board's goal in the second half is to achieve greater certainty of outcome in the core business for investors, and that means to achieve breakeven in the core business”, but that looks a long way from here and meantime “a further £2.5M (A$4.2 million) tranche of debt has been secured with Lombard Odier to continue further restructuring of the business, to create a more appropriate and long term structure, and for working capital”.

However, later in the announcement it is stated “the purpose of these funds will be to meet the group's short term working capital requirements” and they come with an additional covenant applying to them which “requires the company to disclose in its accounts for FY17 an improvement in net assets over the net assets disclosed in the half year accounts... (adjusted for the new tranche as if the new tranche was funded on 30 April 2017). A breach of the net asset covenant would entitle the lenders to call for repayment of the new tranche”.

Enough said, the financial risks here see me continue to avoid. Bargepole ahoy!

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