Blue Star Capital initiation
Blue Star Capital (LON:BLU) is an investment company with a focus on new technologies and on companies with the potential for growth. The company currently has three core assets that operate in the markets for electronic payments and e-sports.
SatoshiPay is a digital payments company that uses blockchain to offer payment services in three areas – micro-payments, digital wallets, and business-to-business (B2B) cross-border payments. SatoshiPay has established an initial base of customer relationships, and the value of Blue Star’s holding has increased more than 3x since it was acquired in 2017.
Sthaler is a digital payments company that offers a unique proprietary biometric ID system. The company has established an initial commercial user base and is now working with a strong pipeline of opportunities to expand into mass usage. The value of the Blue Star holding in Sthaler has increased by a factor of 6x since it was acquired in 2015.
The e-sports portfolio consists of six companies that operate in different specialisms and different geographies in the market for e-sports – one of the fastest-growing entertainment sectors in recent years. The stakes were only acquired by Blue Star in November 2019, but two of the investees have already announced corporate actions that could lead to significant valuation uplifts.
Recent news and catalysts ahead:
Blue Star released its full-year 2019 results on 5 March, confirming a sound position with no debt and no increase in administrative costs. During the remainder of 2020 there are a number of potential catalysts for further valuation uplifts within the portfolio, including anticipated funding rounds for SatoshiPay, Sthaler, and further corporate transactions within the e-sports portfolio.
A portfolio of high growth assets
Tony Fabrizi took on the role of chief executive officer (CEO) in 2012. For much of the time the company has been limited in its investment options due to capital constraints. In addition, the entire portfolio inherited in 2012 had to be written off in full. In spite of these issues, the investment portfolio assembled by the CEO has performed strongly, recording an internal rate of return (IRR) of more than 35%. In the past year, the board has been enhanced and now comprises a strong mix of skills across private equity, corporate finance and media.
In this report, we examine the business drivers behind the three core investments in the portfolio today and the performance of the portfolio as a whole. We argue that Blue Star offers investors exposure to some exciting market spaces, and that continued strong performance in the asset base could justify a valuation re-rating for Blue Star relative to its current price/book discount.
Investment track record and valuation
Year end Dec 31 · Current · 2017 · 2018 · 2019
Investments (£,000s) · 1,706 · 3,497 · 5,289 · 5,101
Operating profit (£,000s) · (166) · (189) · 1,466 · (453)
NAV/Share (GBp) · 0.35 · 0.21 · 0.29 · 0.19
Price/Book · 0.4 · 1.6 · 0.9 · 0.5
Three investees in exciting growth markets
Although the biggest book value at present is SatoshiPay, we believe that there is significant upside potential in the other investments, particularly the e-sports portfolio.
SatoshiPay
SatoshiPay provides a two-way digital payments platform that has applications in three segments of the payments market – micro-payments, digital wallets, and B2B cross-border payments. The platform uses blockchain technology to provide payment solutions that are fast, reliable, cost-effective, and secure.
Blue Star holds a 27.9% stake in SatoshiPay, which is valued at £4.75mln, from initial investments totalling £1.85mln.
Sthaler
Sthaler is an identity and payments technology business that enables a consumer to identify themselves and pay using biometric readings. The technology was developed in conjunction with Hitachi. Blue Star holds a 0.9% stake in Sthaler, which is valued at about £350k, from an initial investment of £50k.
The e-sports portfolio
In October 2019 Blue Star invested £900k in a portfolio of six businesses involved in different aspects of e-sports – spectator-orientated sporting events using video games. The global e-sports market now exceeds US$1.1 billion, attracts hundreds of million viewers worldwide, and continues to grow rapidly. We examine this business segment on pages 5-8.
We next consider each of the three focus investees in more detail.
SatoshiPay
SatoshiPay provides an innovative two-way digital payments platform with applications across a number of segments within the global payment industry. The SatoshiPay platform is powered by the Stellar network, which is a leading global blockchain network and payment technology.
SatoshiPay is targeting three segments within the global payments industry, each of which represents a substantial market opportunity:
Targeted segments of the digital payments market
Source: SatoshiPay
Unique solutions addressing mutil-billion dollar end markets
The SatoshiPay platform has unique advantages in each of the three markets:
Micro-payments represent a growing market segment. These are transactions that can be as low as a few cents, and are often uneconomical using conventional payment technologies. Applications include online publishing (pay per view), gaming, and consumer reward programmes. The SatoshiPay platform offers instant end-to-end payments at a level of commission that makes payments viable for merchants and customers. SatoshiPay has commercial partnerships in place with online publishers such as Axel Springer and Börsenmedien.
Digital wallets are a mechanism allowing consumers to make payments using their mobile or desktop device. The Solar wallet from SatoshiPay, powered by the Stellar Network, has more than 25k installments in 40 countries. It is recommended by the Stellar Development Foundation, which coordinates the Stellar network.
B2B cross-border payments are the most recent market for SatoshiPay. In November 2019, the company announced the new SatoshiPay B2B service, using the same technical platform as the existing products. This is the largest segment in the global payments market and represents an exciting growth opportunity for SatoshiPay.
The value proposition
Across its three segments, SatoshiPay offers instant and secure transfers. It also offers very competitive economics. The following schematic summarises the fee structure for each segment.
SatoshiPay offers competitive economics in each of the targeted end markets
How is the SatoshiPay service delivered?
The SatoshiPay solutions are powered by the Stellar network. This is an open distributed ledger network that enables a wide range of digital transactions. It is used by major global names such as IBM. Stellar is a leading global blockchain, and through a growing network of financial services companies connected to its network can facilitate payments in a number of different currencies, including its own protocol token the Lumen (XLM), which has a market cap of US$1.4bn (Feb 2020).
The application of SatoshiPay via the Stellar network has delivered positive results for SatoshiPay in its initial target market of micro-payments. The company has established commercial partnerships and validated its payment technology in day to day use. The following schematic highlights the main relationships that have helped SatoshiPay to build its market presence.
Initial customer relationships in the micro-payments market
Key relationships
Source: Proactive Research
We believe that the next major step for SatoshiPay will be to launch its B2B cross-border payments service. This will broaden the revenue base, and establish a significant new channel for growth.
Blue Star took its initial stake in SatoshiPay in January 2017, followed by market purchases of additional shares in March and July 2017 and subscription to a convertible note in December 2017. There was a further funding round in July 2018 that triggered a significant valuation uplift in Blue Star’s holding in SatoshiPay, followed by additional funding rounds of larger scale in February and March 2019 that confirmed this higher valuation. The following timeline summarises.
Blue Star's stake in SatoshiPay has been increasing in value
SatoshiPay timeline
Source: Proactive Research
We understand that SatsohiPay will be seeking additional funding this year, which should leave SatoshiPay well positioned for substantial growth during the next few years.
Global e-sports market is growing in viewership and in revenue terms
The esports portfolio
The global e-sports market is a rapidly growing economy. More than 200 million viewers regularly stream competitive gaming tournaments and related content, with a broader fan-base of up to 900 million occasional viewers. Mainstream news media have begun to pay attention to e-sports due to big events such as the UK teenager winning US$1mln in the Fortnite world cup, but for millions of under-30s, e-sports was already a major mainstream activity via platforms like YouTube and Twitch. In terms of revenues, the industry exceeded US$1bn for the first time in 2019.
Revenue drivers include:
Games publishers pay to create tournaments featuring their game to create a buzz about their product. Similarly, there are e-sports tournaments sponsored by the underlying rights-holders who own the franchise on a video game, such as The Premier League, Formula 1, or the NBA.
Media companies pay for e-sports content to drive viewership. Major broadcasters such as Sky Sports, BT Sport, and ESPN now feature e-sports coverage.
Consumer brands participate as sponsors and advertisers, to connect with a hard-to-reach younger demographic.
The following chart illustrates the growth in the e-sports market.
The global esports market
Source: NewZoo
One of the challenges that the industry faces is in capturing the commercial value of the huge audience base for e-sports. Big video sharing and video streaming platforms such as YouTube and Twitch have been successful in monetising their positions in the value chain. Aside from these, a significant portion of the value capture has been claimed by “amateur” content producers, some of whom earn millions of US dollars, and by the e-sports participants.
However, in recent years a growing number of commercial entities have begun to professionalise the e-sport landscape. Many of these are team operators, but also some are e-sport infrastructure companies. The following list highlights the most valuable companies in e-sport as of December 2019:
A number of e-sports companies now have valuations above US$100mln, particularly the team operators
Biggest esports companies
Source: Forbes
The growing professionalisation of the e-sport industry has been attracting increasing investment capital into the space and Blue Star has made investments in a portfolio of early-stage businesses with potential to enter the top tier.
Blue Star e-sport portfolio
In October 2019 Blue Star announced a £900k investment in the e-sport market, comprising six e-sport companies, each valued around £150k.
The Cubs' recent corporate deal establishes one of the top e-sports companies in Australia
The Cubs
One of the six investments was a 13.3% stake in a business called The Cubs, operating in the Australian market. This business subsequently changed its name to Diemens Esports. In February 2020 Diemens announced its intention to merge with Critical Hit Entertainment PTY Ltd (CHE).
The Cubs will become one of the largest e-sport infrastructure providers in Australia, with combined revenue of AU$600k, operating organised competition networks in high school and university student competition as well as corporate and club level e-sports.
Assuming the transaction proceeds, Blue Star’s stake in the combined entity will be 6.6%. This has been an investment that has developed rapidly since the original acquisition, demonstrating the dynamic nature of the e-sport market.
The Drops
The Drops is an e-sport team operator, based in Canada, which will field teams in Rocket League, Fortnite, FIFA, and CounterStrike Global Offensive.
In February 2020 The Drops announced that it had exchanged letters of intent for its entire share capital to be acquired by Fibersources Corporation, an entity listed on the TSX Venture Exchange, in an all-share deal, allowing The Drops to achieve market listed status. Furthermore, The Drops intends to cancel some founder shares, which would increase Blue Star’s holding from 13.6% to 18.6%.
Assuming that the transaction proceeds, we believe this could potentially lead to an uplift in the valuation of Blue Star’s holding.
Big growth opportunities in the Asian e-sports market
Googly
Googly is an e-sport tournament operator based in India. This is a large and fast-growing e-sport market, with prize money more than doubling each year in 2017, 2018 and 2019 (data from AFK Gaming). Blue Star’s shareholding in Googly is just over 11%.
Dynasty
Dynasty Esports PTE is a Singapore-based business addressing the Malaysian market. Malaysia is already a rapidly growing market for e-sport, and we believe that this will be accelerated by a programme of government investment that is already underway, aimed at making Malaysia a regional hub in the e-sport industry. Blue Star’s shareholding in Dynasty is 13.7%.
The Lords
The Lords is a London-based e-sport team operator that will initially compete in FIFA and Fortnite, with plans to expand into Rocket League and CounterStrike. Blue Star’s shareholding in The Lords is 11%.
The Dibs
The Dibs is an e-sport team operator based in Los Angeles that will field all-female teams in major e-sport tournaments. This business is at an early stage, with the potential to grow strongly. Blue Star holds a US$185k convertible loan note, which will represent a 13.7% holding in The Dibs Esport Corp upon conversion.
E-sports market is growing rapidly, Blue Star's investees well positioned to benefit
Conclusion on e-sports
E-sports presents an opportunity for the monetisation of a rapidly growing market, a market that is growing both in overall size, and lifetime value per user/viewer. Those opportunities lie in both the e-sports teams themselves and the infrastructure that supports competitive and recreational e-sports competitions.
The Blue Star e-sport portfolio was acquired in October 2019, but already two of the investees have undertaken corporate actions that could trigger valuation uplifts on completion. The e-sports market is a very dynamic and fast-moving space, and we believe the board are very confident of seeing a number of value-enhancing events during 2020.
Sthaler
Sthaler is an identification and payments technology company that uses a unique biometric finger vein identification system. The system was developed jointly with Hitachi, using hardware that is already widely adopted in Japan. Sthaler’s aim is to commercialise the technology globally in the area of payments. The Sthaler system is already in use with launch customers in a number of jurisdictions and has a substantial pipeline of trial programmes in progress, as well as strategic partnerships in place with organisations such as Mastercard and the FCA and Open Banking Organisation.
Biometric identification is a rapidly growing market, as the technology gains increasing acceptance among consumers and enterprises worldwide. The following chart shows the growth in the global biometric systems market.
The biometrics systems market is growing fast as consumers and merchants gain acceptance of the technology
Global biometrics systems market
Source: Sthaler
Within this market, Sthaler offers a highly differentiated solution for providing fast, secure and reliable payments.
The FingoPay system
FingoPay uses a finger vein ID system to uniquely identify registered users. Scanning the pattern of finger veins offers a more secure and reliable solution than finger-print reading, is faster than chip-and-pin, and can be used without the restrictive transaction limits that usually apply to contactless card payments.
The system is made available to retailers and governmental organisations using a licensing model, with an upfront fee followed by additional fees based on transaction volumes.
The initial target market is point-of-sale payment terminals. The technology also has applications in access control and in other adjacencies such as car hire and identification within educational institutions.
The following schematic summarises the market applications for FingoPay.
Fingopay
Source: Sthaler
Exclusive licence to market the Hitachi hardware for payments in wide-ranging global markets
The IP and route-to-market
The FingoPay system was developed in conjunction with Hitachi, using hardware from Hitachi together with the Sthaler operating system. Sthaler holds an exclusive licence to market the Hitachi VeinID as a payment solution in most territories outside of Asia – the Americas, Australia, MidEast, Africa, the EU and UK.
In addition to Sthaler’s own marketing efforts, Hitachi’s own sales force is incentivised to sell the FingoPay system within these geographies.
The formula has been successful, generating multiple launch customer relationships and pilot projects in various European countries, the Middle East and North Africa.
The largest market the company is targeting is Egypt, with a population of 100 million. We understand that Fingopay is now being piloted in Egypt by the banking industry to authenticate payment transactions and by the Ministry of Supply to authenticate government food subsidies. If these pilots prove successful then these contracts alone have the potential to make Sthaler highly profitable.
In addition, Fingopay has won the following awards in 2020:
- The Fintech Power 50 - Most influential, innovative and powerful figures in the Global Fintech industry 2020
- Card & Payment Industry Awards - Industry Innovation of the Year 2020
- Fast Company - Top 50 World’s most Innovative Companies 2020
We believe that 2020 could be an important year for Sthaler in terms of converting trial programmes and initial orders into significant revenues streams, as well as expanding the merchant base.
Blue Star holding in Sthaler
Blue Star made its initial investment in Sthaler in 2015, taking a 1.45% stake for £50k. The holding value registered significant uplifts in 2016, 2017, and 2018 on subsequent funding rounds.
The following table summarises the history of Blue Star’s holding in Sthaler.
Source: Proactive Research
We understand that Sthaler has recently been raising funds on a £40mln valuation and while the round is not closed we believe this would lead to a valuation uplift for Blue Star's stake. It is likely that a further funding later this year would leave Sthaler well positioned for substantial growth during the period 2020-2024, in our view.
Management team and investment performance
Tony Fabrizi took on the role of chief executive officer (CEO) in 2012. In the past year the board has been enhanced and now comprises a strong mix of skills across private equity, corporate finance and media:
A management team with breadth and depth of experience
Anthony Fabrizi — chief executive officer
Tony Fabrizi qualified as a chartered accountant with KPMG in 1986 and joined James Capel (later HSBC Investment Bank) in 1987. He worked in corporate finance and spent eight years undertaking UK transactions, becoming a director in 1993. He joined RP&C, a US investment bank, as a partner in 1998 to help develop its UK business.
In 2002, he established Ghaliston Limited as a corporate finance advisory business. Following its acquisition of Merchant Securities Limited in 2006, the enlarged company listed on AIM.
Fabrizi joined the board of Blue Star Capital in April 2011, initially as a non-executive director, before taking on the role of CEO in July 2012.
Derek Lew — non-executive chairman
Lew has advised, started and invested in technology companies for more than 20 years. An active member of the technology community in Vancouver, he is president and CEO of venture capital fund manager GrowthWorks Capital Ltd and past-chair of Innovate BC. Lew is a partner with Initio Group, a Vancouver-based early-stage angel investment firm.
Sean King – non-executive director
Sean King has more than 20 years’ experience in publishing and digital content, having set up Square One Group in 1994, which was one of the fastest-growing independent content agencies in the UK. In 2007, Square One Group was acquired by Seven Publishing with King acting as CEO for the enlarged group until April 2018.
King now acts as an independent board advisor to a number of brands including Captify, (a fast-growing pioneer in search Intelligence); Octaive (an ad:tech start-up based in London and New York); DADI (a blockchain-powered decentralised global cloud computing network); Fanfinders, a fast-growing company specialising in the supply of first-party opt-in data in the UK baby market; and Family Traveller, a market leader in the highly lucrative family travel sector.
Shareholdings
The management team has significant shareholdings in Blue Star Capital. We argue that this provides good alignment with the interest of shareholder value-creation. The following table shows the management shareholdings at year-end.
Management incentivisation well aligned with shareholders
Source: Blue Star Capital
In addition to this, after the year-end there have been additional warrants granted. The following table summarises these grants.
Source: Blue Star Capital
These warrants represent an additional layer of incentive alignment, but also a source of potential additional funding for Blue Star. The first tranche of warrants was exercised in February 2020 – 50mln warrants at 0.1p.
Since Tony Fabrizi became CEO in 2012, the performance of investments acquired subsequent to this has been very positive. The following table summarises the key events:
Source: Proactive Research
IRR of 35.4% per year
Base on this timeline, it is a straightforward exercise to calculate the internal rate of return (IRR) for the portfolio assembled since 2012.
Using the dates and values of the incremental capital commitments – Dec 2013, June 2015, Jan-Jul 2017, Dec 2017, Oct 2019 – and the final value of these assets at £6.0mln (March 2020), we arrive at a monthly IRR of 2.56%. The final value of £6.0mln values the e-sports portfolio at acquisition cost and does not apply any valuation uplift as the relevant transactions have not yet completed.
This monthly return of 2.56% equates to an annual IRR of 35.4%.
Conclusion
We argue that this investment performance could potentially be repeated going forward and that this should increasingly translate into positive performance for the Blue Star share price. Factors supporting this view include:
- Zero debt on the balance sheet, and an improved basis for raising future capital to take advantage of opportunities that may arise.
- Historic levels of administrative cost were sharply reduced when Tony Fabrizi became CEO, and remain low at around £350k.
- A broadened pool of management expertise, bringing experience from private equity, corporate finance and media.
- Positive track record for the current portfolio of assets.
We argue that sustained performance could justify Blue Star shares trading at a premium to Net Asset Value, as opposed to the current 48% discount.