Will eServGlobal Limited be the ASX's best disruptive technology business?

Can eServGlobal Limited (ASX:ESV) deliver shareholders big rewards in the years ahead?

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New technology companies pose real threat to the dominance of the banks but you wouldn't get that sense by looking at their share price performance this year.

If anything, shareholders in these emerging industry "disruptors" are beating a hasty retreat with their tails between their legs even as the Commonwealth Bank of Australia (ASX: CBA) closed at a record high of $85.35 on Monday.

The banks are one of the better performing sectors of 2014 with the average capital gain of the big four banks coming in at 1.4%. Throw in dividends and franking credits and you will probably be pocketing over 7%. Not too shabby given that the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) benchmark (including dividends and franking) is only rewarding investors with a little over a 4% return.

Sure, not all the banks have done so well. The ones with operations that are sharply focused on Australia have led the charge. Shares in Commonwealth Bank and Westpac Banking Corp (ASX: WBC) are up 9.7% and 1.6%, respectively.

In contrast, Asia-driven Australia & New Zealand Banking Group (ASX: ANZ) and UK-exposed National Australia Bank Ltd. (ASX: NAB) are 0.8% and 4.9% in the red.

However, their dividends would lift them above breakeven for the year, and the losses aren't that bad when compared with small cap "movers and shakers" that are seen to be on the cutting edge of the financial industry.

NewPayment

Mobile card payment solutions start-up Mint Payments Ltd (ASX: MNW) is the worst with a loss of close to 80% after delivering a stunning return of over 1,500% in the 2013 calendar year.

Money remittance company eServGlobal Limited (ASX: ESV) is also giving ground to finish the year 30% in the red after rewarding investors with a 142% jump last year, while Chinese mobile commerce company 99 Wuxian Ltd (ASX: NNW) has surrendered all of this year's 80% gains and then some.

All three have been afflicted by one or more of the following – slower-than-expected adoption of their technology, growing uncertainty about the company's ability to take on larger rivals, unexpected management shake-ups and long pauses between positive news (which usually sucks the wind out of any speculative small cap stocks).

The latest to be under the uncomfortable glare of the market spotlight is eServGlobal as it announced a $5.5 million placement to institutional investors following Friday's full year result for the period ending October 31.

While it's comforting to see that the company can still attract support from professional investors, the earnings numbers were disappointing with flat revenue of $31.3 million from its traditional Mobile Money business compared to my expectation of a 10% increase.

While its net profit jumped 37.3% to $14.2 million, this includes the $31.7 million profit it made from the sale of part of its interest in HomeSend to credit card giant MasterCard.

The Mobile Money business allows users to gain access to banking facilities via a mobile phone. This is particularly important in less developed countries (like in the Middle East and Africa) where the majority of the population have no or limited access to banks.

On the other hand, HomeSend is a remittance platform that allows users to transfer cash to other mobile phone users. HomeSend currently connects 99 sending countries to 32 receiving countries, and more country connections are expected in 2015 with MasterCard now leading the joint venture (JV).

The stock dropped over 3% to 57 cents on its result and is hovering around that price since. The question facing investors is whether to "buy" or "bail".

Before I share my thoughts, I can't stress enough that the stock is only suitable for those with a high tolerance for risk. All technology disruptors are speculative by their very nature.

The first thing we need to work out is whether there's still room for Mobile Money to grow. Its chief executive Paolo Montessori seems to think so. While management has not given guidance, he pointed to the company's strong backlog of work and appears confident in delivering growth and better margins for this business.

The company even claims that on an "adjusted basis", Mobile Money's EBITDA improved to $2.6 million in 2013-14 from last year's $1.7 million. But the accounts were messy with the exclusion of one-off costs and other items associated with the HomeSend business.

I'll give him the benefit of the doubt for now. But if I don't see tangible signs of growth at the half year result in in late June or early July next year, I'll be inclined to sell first and ask questions later.

The other big piece of the puzzle is HomeSend. eServGlobal's share of net operating loss from the JV in 2013-14 is $2.3 million, which is around 20% worse than I had anticipated. I was counting on HomeSend delivering a maiden profit this financial year, but I am now pushing that back to 2015-16.

HomeSend alone is enough to be a company maker given that the total value of global remittance stands at $US500 billion. HomeSend charges 1.5% of the transaction value, and even a tiny market share will put tens of millions of dollars into eServGlobal's pocket (eServGlobal owns 35% of the JV).

But there's the rub. Will HomeSend live up to its potential? MasterCard seems to be putting in the effort to grow the business but I think the market is reluctant to ascribe much success to the JV. History has shown how smaller ASX-listed companies have been bent over the barrel by their larger "partners".

The more important question is whether eServGlobal is cheap. To put it in another way, at 57.5 cents, what's in the share price.

If you assume that Mobile Money and HomeSend will be a moderate success at a minimum, then the answer is "not much".

Based on my discounted cash flow (DCF) estimates, the current share price implies that the value of transactions handled by HomeSend will peak around $1.5 billion, or about 1% of the addressable market. That's conservative, especially given the push by governments to lower high transaction costs associated with remittance services. HomeSend is part of a lower fee solution.

However, if I assume that HomeSend will win a 10% market share by the end of 2017-18, then the stock should be worth well north of $2 a share on a DCF basis.

Big risk, big rewards. You just have to love small caps.

Motley Fool contributor, Brendon Lau, owns shares in eServGlobal, Mint Payments, 99 Wuxian and National Australia Bank.

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