(Asx: EML) | EML Payments

Apr 19, 2022

Sentiment: Bullish

Type of Trade: Aggressive, High Growth

Industry: Information Technology Services

Sector: Information Technology

Eml Payments Ltd is engaged in the provision of prepaid payment services. Its combined portfolio offers payment technology solutions for payouts, gifts, incentives, rewards, and supplier payments. The group operates in three segments: Gift & Incentives, General Purpose Reloadable, and Virtual Account Numbers. The company helps business all over the world create high level of customer experiences.

We have pinpointed the key operations of this Company so you can understand the business mode before thinking about entering into a position.

1. Pre-Paid Operation with long term contract in place.

2. Gift Card Operation includes incentive gift cards not only exploiting in shopping malls market buy also very popular in the corporate cards for employees in 27 countries

3. Government Payments in Europe, including distribution of wealth far and funds to people.

4. Digital banking ecosystem.

5. Successful prospect on investing in technology and more developments on the pipeline.

6. Most of its expansion was made by low risk acquisition of other businesses, in order to buy other technologies and footprint in different markets.

Business Update

✅ Company singed and launched major new customers in all verticals with sales pipeline momentum evident in all markets.

Company continue to grow rapidly across geographies and business unit in 2022.

Over 60% of company’s revenue comes from Europe (not necessary PCSIL but 30% of overall revenue); over 20% revenue comes from North America and the balance from Australia, not to mention that 85% of the revenue is recurrent which puts the company in very strong underlying room to grow.

The overall situation with PCSIL has been mostly resolved via remediation plan and the company has been able to pursue new contracts. The cost will be shown in FY22, however the company remain in line with the guidance.

✅ Acquisition of Sentenial Limited first annouced in April 2021 has now been completed. Sentenial, through its Nuapay brand, is a leading open banking player in Europe. This acquistion will bring further sustainable grow to the company.

✅ EML has recently Launched open banking proposition in Australia in partnership with Frollo.

✅ Launched “new state of the art” processor, TRACE, in Europe.

✅ Established Finlabs, invested USD7m in Hydrogen and Interchecks.

✅ Becoming a direct member of the faster payment network in the UK.

EML overall revenue should be benefit from re-opening trade worldwide as well as the acquistion of the Sentenial business.

🚩 EBITDA is down 4% in H1 FY2022. Mostly regarding the costs related to the Problem with Central Bank of Ireland (CBI) in relation to regulatory concerns it raised in May 2021 to EML subsidiary Pre Financial Services business in Ireland, the company has released announcement in the market in October 2021 that this issue could materially impact the European operations of the PFS business. The current cost was showed on the underlying EBITDA ($11.4m) . This cost has been already insterted in H1FY2022 which now shows more transparency to shareholders.

Furthermore, the acquistion of Sentenial has also impacted the EBITDA, however it will cerntainly bring further sustainable growth to EML.

Whilst acknowledging the remediation program currently underway and governance improvements with PCSIL Board, the CBI has advised that PCSIL’s proposed material growth policy, as requested and approved by the PCSL Board, is higher than what CBI would want to see. Furthermore, CBI has proposed that certain limits be applied to programs that, if implemented, could have a negative impact on the PCSIL business.

Financial Result

EML presents very healthy results with significant positive increase in every segment of its operations and very strong FY22 first quarter.

Revenue Up 20% $114.4m

Gross profit up 12% $75.4m, mostly affected by the high overhead and additional resources to support the CBI remediation, insurance and audit cost for consolidation of Sentenial.

Underlying EBITDA which is one of our Key indicator up 11% on the prior comparative period

Underlying NPATA up 6% $13.1m.

👉 Note that the revenue grow as excellent despite the company inability to launch new programs in Europe associated with PCSIL, the company is now allowed to issue new contracts.

Obviously FY2022 shall be affected by the costs involved on the PCSIL business and CBI, however EML remains in line with the initial guidance expectatios as H2 FY2022 wil benefit from improved trading conditions as result of improved interest revenew with further investments in bonds, improved economics on revisded commercial agreements with EML schemes, introduction of new inactive account maintenance fees on European GPR program and finally the commenced lauching new European programs in December as CBI licence restrictions eased.

The overall Financial performance was very positive with compelling growth numbers.

EML Growth

It appears the big hit of the company is the acquisition of the Open Bank NUAPAY, which the company’s believe that will fundamentally change the way people move money over the next decade. As open banks keeps on gaining momentum globally, due disruptive technology, regulatory changes and instant account payments, lading to more innovation and competition in financial services, the company has been well positioned to take advantage of this fast growth industry, hence should have direct effect on the company’s overall growth strategy.

Technical Analysis

The stock is currently trading 8% above the SMA, still down by 45% from 52 weeks ago, mostly dragged by the problem with CBI. The SP was in very steady ascendent trend until the Central Bank of Ireland (CBI) issue, which has been mostly resolved despite the cost which has been already factored on FY2021 EBITDA. Overall, EML has outperformed most of the tech stocks if wasn’t for the problem with CBI.

Entry Details: (Restricted to VIP members only, logging is required for this area)

Entry: under $3

Risk: Medium

Strategy : BGS 20

Target 1 : $ 3.98 | 26%-30% Profit

Target 2: N/A

Lead time: 1 to 3 months.

Stop loss: under $2.5

✅ EML shall benefit from opening trade across the World.
✅ Sentenial Acquistion will bring significant grow to the company and that should already be seeing in FY2022
✅ EML should keep its guidance for FY2022, we believe EML is on track to even exceed. If that is confirmed we will likely to see some movement on SP.
✅ SP trading 7% above the SMA 40 offering technically fair price for an entry.
✅ Strong results with for a company with very solid fundamentals.
✅ EML offers a strategically diversification from EV stocks that have been running very high in the last 6 months.
✅ EML has been a potential take over target, despite we don’t make our buying decisions upon speculating whether the company will be bought or not, we have seen some recent activity from Bain Capital (private equity fund) in buying EML. Discussion have now ceased though.
🚩 SP is still trading under a bearish trend, but so is most of the tech sector. Despite this bearish trend, EML has still outperformed other tech stocks and most of the SP degradation was result of the PCSIL problem with CBI.
🚩 EML is currently among the 7 most short traded stocks on ASX. This can be good and bad, once the stock turn around, the fact the stock is largely shorted will rapidly accelerate the upside with shorters liquidating their positions, this process tend to be very fast and ideally traders want to be IN the stock when that happen.

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