(Asx: EML) | EML Payments

Nov 17, 2021

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 2021.

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 could be mostly resolved by Christmas via remediation plan with any residual item by March 2022.

✅ Acquisition of Sentenial Limited in April 2021. Sentenial, through its Nuapay brand, is a leading open banking player in Europe. The transaction is expected to settle following the final regulatory approval which is expected to be received in Q1FY22. (This is a SP price sensitive information, and its announcement this quarter shall have direct impact on SP).

✅ 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.

🚩 Regarding 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) . 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. The CBI has invited PCSIL to provide it with submissions in relation to the potential directions, which PCSIL intends to do by 28 October 2021. Overall, the remediation plan remains on track.

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 by 29% on the prior comparative period

Gross profit up 20% on the prior comparative period

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

Underlying NPATA up 41% on the comparative period.

👉 Note that the revenue grow as excellent despite the company inability to launch new programs in Europe associated with PCSIL

✅ Record Financial Results

🚩 Obviously FY2022 shall be affected by the costs involved on the PCSIL business and CBI .

✅ Underlying EBITDA up 65% ($53.5m), and growing year on year. The company has also showed the impact of CBI costs related to the problem that has dragged the SP down by 50% in May 2020. (see the chart below). Provided that investors are now more certain of the overall impact of the problem on the company’s balance sheet, we believe this is an one off cost in line to the market expectation.

✅ Operating Cashflow up 121% (%48.8m)

✅ Revenue up 60% ($194.2m) despite small decline on Virtual Account (VAN’s)

✅ Underlying NPATA up 54% ($32.4m) *** excluding provision for CBI costs ($11,352)

✅ Cash at Bank up 19% ($141.2m).

✅ Gross Debit Volume (GDV) increased by 42% ($19.7bn). The company generates revenue from processing payments volume of prepaid stored value products on EML processing platform. The gross value of these transactions are key indicator of future revenue.

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 13% under SMA, still down by 45% below April 2021 at all times high. The SP was in very steady ascendent trend until the Central Bank of Ireland (CBI) issue, which we believe will be resolved despite the cost which has been already factored on FY2021 EBITDA. Early in October the SP was once again hit by sellers with the announcement of the company, saying that the impact with CBI could have a larger effect on the PCSIL business, that currently accounts for 27% of EML revenue.

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

✅ Red candles on the waydown has loss momentum.

✅ Green candles on Heiken Ashi suggesting a potential reversal across the current levels.

✅ Potential bullish intersection level 2

✅ SP trading 13.5% below the SMA 40 and 20% below the SMA 250 offering a very good entry at technically discounted price.

🚩 SP is still trading under SMA and after bearish intersection level 2, hence, the use of Stop loss is a must.

Today’s is currently sitting at the so called hypothetical support range. Since the SP taken another hit by investors selling off due the uncertainty surrounding the PCSIL business, we see this as another great opportunity to enter, remaining that PCSIL business contributes for 27% of the overall company revenue at moment and that it is very likely the company will continue to be operating, despite some tightening rules. Furthermore, SP is currently trading 45% below the ATH, suggesting majority of this problem has once again already been factored into the current SP. Provided the uncertainty remains, we would re-classify EML as a trading stock at moment until the company announces the real impact of the issue regarding the PCSIL business. We believe this stock is once again, currently undervalued, offering another great entry opportunity at the current levels of the blue channel $3-3.2

Entry: $3-$3.2

Risk: Medium

Strategy : BGS 20

Target 1 : $ 3.98 | 24%-30% Profit

Target 2: N/A

Lead time: 1 to 3 months.

Stop loss: under $2.8

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