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(Asx: EML) | EML Payments | UPDATED

Nov 17, 2021

Sentiment: Sideways

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

Acquisition of Sentenial Limited in April 2021 is not completed. Sentenial, through its Nuapay brand, is a leading open banking player in Europe. This transaction is now completed (Even Though, we expected this acquisition to be SP sensitive for EML, the stock was still affected by the sell off on tech sector. Nevertheless, comparing EML to other stocks, it is clear that EML has outperformed most of the tech sector. We believe that results will be very positive in the FY2022.

✅ 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, has taken a productive direction, with most of the const involved already shown in the H1FY22 EBITDA. Furthermore, new contracts are now allowed which is very positive to EML.

Financial Result FY2021 & H1FY2022

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

Revenue in FY 2021 was up by 29% on the prior comparative period, and up 20% alone in H1FY22 to $114.4m)

  • PCSIL was permitted to sign new customers and onboard new programs despite the CBI problem in 2021

Gross profit up 20% in FY2021 on the prior comparative period.

Completed the acquisition of Sentenial Ltd enabling EML to enter the European open banking industry.

Underlying EBITDA which is one of our Key indicator was up 11% in FY2021 on the prior comparative period, however

🚩 Underlying EBITDA in H1FY2022 was down 4%. Most of the margin was impacted by lower net interest (down $2.7m) and lack of European setup fees (down $2.4m). Also overheads increase was necessary to consolidate Sentenial, as well as to manage CBI remediation, such as additional resources, insurance and audit costs. Nevertheless, once it is behind and with Sentenial acquistion completed, EML is now well positioned to support future revenue growth. Sentenial will have very strong impact on the company’s GDV growth.

✅ (NEW) Revenew continue to growth despite investor dump the stock after the release of Q3 FY2022

🚩 (NEW) Company has posted Q3 FY2022 Trading Update, with EBITDA down 8% YoY. Most of the downgrade related to the acquisition of Sentenial and the remediation of CBI, which we already knew. While EML can now trade and launch new programs in Europe, we see a positive Q4 and FY2023 onwards as long as EML does not acquire further thereby affecting again its EBITDA.

🚩 (NEW) EBITDA also smashed by a higher overheads which was up 31% on YTD PCP driven by investment in headcount in Europe, increased IT expenditure and inclusionn of Sentenial.

EML will benefit from higher interest rates, unlike many other tech companies.

✅ GDV was up 26% in 2021 however up 209% on PCP in the H1 FY2022.

👉 Note that the revenue grow as excellent despite the company inability to launch new programs in Europe associated with PCSIL during 2021

🚩 EML has reported during its Interim Results H1FY 2022 that the company remains in line with guidance expectation for FY2022, and could even exceed the expectations from improved trading conditions which has been critical for our decision to buy into the company. Nevertheless we now see a relatively large downgrade due the following items.

🚩 Obviously FY2022 shall be affected by the costs involved on the PCSIL business and CBI, nevertheless this risk has been already factored in the stock price.

✅ 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.

✅ 14/04/2022 – EML has confirmed to be in discussion with Bain Capital for a possible takeover. Although EML confirmed that earlier in the year it was in discussions with Bain Capital regarding a potential change of control proposal. Those discussions have now ceased however the interested on EML shows the strength of the business.

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.

The company is also making great progress on its 3 year strategy

Technical Analysis (UPDATED)

SP is now sitting at 68% below its 52 weeks trading price and 70% below April 2021 at all times high. The SP was in very steady in sideway after the massive fall as result of Central Bank of Ireland (CBI) issue, which has been taking ongoing solution, with a high cost that has been already factored on FY2021 EBITDA. Remembering that PCSIL business, that currently accounts for 27% of EML revenue, the company has reported a 8% downgrade on its underlying EBITDA resulting to a 35% sell off. This downgrade is also result of high overheads and the acquisition of Sentenial.

Nevertheless, we are still positive over the long term prospect of the company as long as EML avoids acquiring further businesses in the next 12 months.

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

✅ Trading on the bullish side of the SMA.

✅ Bullish intersection level 1 confirmed.

✅ Bullish intersection level 2 confirmed.

✅ Green Candle on the Heiken Ashi.

✅ EML currently offering high fundamental value among competitors.

✅ SP Trading 8.74% above the SMA, 13.5% below the SMA 40 and 20% below the SMA 250 offering a very good entry at technically fair price. Ideally we would like to buy the stock at technically discounted price. It is likely to see some further pull back on Tuesday with tech sector sell off.

✅ EML can be directly benefited from higher interest rate environment. Unlike payment companies, EML is a company that offers payment solutions rather than lending funds as Zip, Afterpay and the so called BNPL. Most of the investors don’t understand the difference.

🚩 SP is still trading at the SMA slightly higher than we ideally would like to buy, but still out of FOMO area.

Just as other tech stocks, SP taken downtrend, however not as considerably as the sector. Most of the fall was due to the uncertainty surrounding the PCSIL business. With the solution been addressed, despite the higher cost involved in the process, we now see a lot less uncertainty in the company, as result another great opportunity to enter. It is important to investors and traders to know that 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. Since SP is currently trading 48% below the ATH, suggesting majority of this problem has once again already been factored into the current SP.

🚩 Since we did not expect the downgrade or the miss forecast by EML, SP has taken a massive fall. Although we believe it was an overreaction due the fact companies normally don’t miss forecast as such as, EML is still positive with the acquisition of Sentenial being a big contributor for this EBITDA drop, as well as 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. We do not encourage to average down though as it goes against BG Trading Strategy. Whether we are going to keep our position or sell it will depends on the stock recovering in the next few days.

Original Entry: under $3

Risk: Medium | mostly affected by the sector sell off.

Strategy : BGS 20

Target 1 : $ 3.95 | 24%-30% Profit

Target 2: N/A

Lead time: 1 to 3 months.

Stop loss: under $2.5

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