Back in 2010, Hank Uberoi, a former co-chief operating officer of Goldman Sachs technology division, took a look at the "blue sky" opportunity offered by Earthport (EOP). The company started with grand ambitions around the time of the dot.com bubble, but had suffered since with a succession of ineffective management teams. Mr Uberoi's interest centred on two attractive aspects: a scalable technology platform; and network connectivity that would take a very long time for any potential competitor to replicate.
- Cash pile
- Fast expanding market
- Impressive customer list
- Huge operational gearing
- Loss-making
- No dividend
The company's core business model centres on a white label technology platform that processes low value cross-border payments. And this direct-to-bank approach allows clients, which range from banks to e-commerce businesses, to transfer money to anywhere in the world. It does this in the local currency at a price point that no bank can match and at a significantly lower cost to the consumer.
It may sound simple, but it is a whole new industry. At the moment, banks are more geared towards relatively high value payment transfers on which they charge high transaction fees. Furthermore, for the end user there is little or no transparency on costs due to the multiple charge points from one end of the transaction to the other, including the turn made on the exchange rate.
Earthport changes all of this because it makes a single charge on each transaction, not the transaction size. So banks rather like Earthport because they can use its platform to save money on the low-value transfers that they are obliged to process. Among those to have signed up for the service so far is Western Union, the world's biggest money transfer agency. And as well as the cost savings, Earthport offers the advantage of allowing the whole process to be transacted online.
| EARTHPORT (EPO) | ||||
|---|---|---|---|---|
| ORD PRICE: | 22p | MARKET VALUE: | £85m | |
| TOUCH: | 22-23.5p | 12-MONTH HIGH: | 24p | LOW: 12.75p |
| FWD DIVIDEND YIELD: | nil | FWD PE RATIO: | See additional table for forecasts | |
| NET ASSET VALUE: | 3p | NET CASH: | £9.6m | |
| Year to 30 Jun | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 1.95 | -5.08 | -5.26 | nil |
| 2011 | 2.49 | -7.52 | -4.42 | nil |
| 2012 | 3.02 | -9.63 | -3.87 | nil |
| % change | +21 | - | - | - |
Normal market size: 10,000 Matched bargain trading Beta: 0.73 | ||||
While most large institutions are slow to change established practices, momentum is gathering behind Earthport's product. Indeed, in the last half of 2012, nine new customers were signed up including Bank of America, while earlier this year the group announced a tie-up with BB&T Corporation, one of the largest financial services holding companies in the US, followed in March by American Express.
The icing on the cake came when the International Finance Corporation (IFC), which is part of the World Bank, invested $10m (£6.6m) in new shares in Earthport in late May. The investment will provide Earthport with access to 900 financial institutions worldwide that are part of the IFC's network and are now all potential clients. It is also a big endorsement of the technology, given the World Bank's comment to aiding developing economies by lowering international money transfer costs.
| Take-up | Revenue (£m) | Gross profit (£m) | ||||
| 2013 | 2014 | 2015 | 2013 | 2014 | 2015 | |
| Low | 4.68 | 11.6 | 23.9 | 3.51 | 8.70 | 17.8 |
| Medium | 5.40 | 13.8 | 35.8 | 4.10 | 10.5 | 27.2 |
| High | 5.82 | 15.9 | 45.4 | 4.53 | 12.3 | 35.1 |
Source: Charles Stanley
Earthport is loss-making at the moment and there is no dividend, but as newly signed customers increase their take-up of the service, this should change - and fast. While it is hard to forecast progress, broker Charles Stanley has forecast a range of numbers based on different levels of take-up (see table), all of which look pretty impressive. In all cases, operating profits are first expected in 2015, ranging from £3.5m to £19m depending upon take-up. High fixed costs also means that once breakeven is reached, additional sales will mostly head straight to the bottom line.
