EML Payments Limited

Company Overview: EML Payments Limited (ASX: EML) is a financial services company specializing in stored value products and provides prepaid payment services in Australia, Europe, and North America. The group reports its financial performance under three segments, namely Gift & Incentive (G&I), General Purpose Reloadable (GPR) and Virtual Account Numbers (VANS). The portfolio of the company offers advanced financial technology that provides solutions for payouts, gifts, incentives and rewards, and supplier payments. The company issues mobile, virtual and physical card solutions to some of the largest corporate brands around the globe.

EML Details

Seventh Consecutive Year of EBITDA Growth: EML Payments Limited (ASX: EML) is a financial services company specializing in stored value products and provides prepaid payment services in Australia, Europe, and North America. As on 8 September 2020, the market capitalization of the company stood at ~$1.09 billion. 2020 was a challenging year for the company, however, it maintained its decent growth in various segments. The company has launched Project Accelerator to benefit from partnerships/investment opportunities with rapidly growing technology solution providers and is likely to expand its global footprint and product offerings.

The company has recently released its results for FY20, which was a year of a mix of opportunities and risks. During FY20, the company reported an increase of 54% Y-o-Y in gross debit volume (GDV) to ~$13.9 billion and reported a record revenue with an increase of 25% Y-o-Y to $121.6 million. The group generated a gross profit margin of 73.0%, reflecting a decline of 2.1% on the pcp and reported the seventh consecutive year of EBITDA growth with a CAGR of 65% over the past five years from FY15 to FY20. During the year, it reported record EBITDA of $32.5 million, reflecting an increase of 10% from $29.7 million in the prior year and a record NPAT of $24 million, up by 17% on the pcp. EML has a substantial war-chest for future acquisitions as opportunities emerge, with a cash balance of $118.4 million and retains a healthy balance sheet with no secured debt at financial year-end. This is likely to cover future operational needs and provides a platform to make future accretive investments.

The group continued to sign new contracts with customers in each segment and has seen increased activity in new business contract wins and program launches. The company has a strategy of diversification from products, geographies, and financials. EML is working to enhance its platform and technology to take advantage of the shift towards the digital economy. The company is enhancing its product offering to both fin-techs and highly established corporates and is targeting fast-growing sectors to capitalize on the declining use of cash in global payments.

FY20 Financial Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of EML Payments Limited.

 Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Increased Profitability and Stable Balance Sheet: During FY20, gross margin of the company stood at 72.8%, higher than the industry median of 50.9%. This indicates that the company is managing its costs well and is capable of converting its revenue into profits. In the same time span, EBITDA margin of the company stood at 20.2%, higher than the industry median of 17.4%, indicating increased profitability. During FY20, current ratio of the company was 0.75x, and assets/equity ratio of the company was 4.32x. In the same time span, the company reported a debt/equity ratio of 0.1x, lower than the industry median of 0.16x, indicating a financially stable balance sheet.

 Key Margins (Source: Refinitiv, Thomson Reuters)

FY20 Segment Performance Highlights: The group reports its financial performance under three segments, namely, Gift & Incentive (G&I), General Purpose Reloadable (GPR) and Virtual Account Numbers (VANS). During FY20, Gift & Incentive segment performed well in a difficult environment, with GDV growth of 11% to $1.17 billion, which compares favorably to GDV of $1.06 billion in FY19. GDV from General Purpose Reloadable segment grew by 54.3% to $4.2 billion, driven by strong organic growth from Salary Packaging programs, resiliency in gaming and disbursement programs, and the acquisition of Prepaid Financial Services Group. In the Virtual Account Numbers (VANs) segment in North America, GDV increased by 62% to $8.47 billion, driven by organic growth in existing customers.

Despite the challenges from COVID-19, revenues in G&I segment increased by 3% to $68.2 million. The GPR segment witnessed an increase of 75% in revenue to $41.9 million, with continued organic growth of salary packaging programs and the acquisition of PFS. Revenue in the VANs segment went up by 66% to $10.7 million, growing in line with GDV growth.

FY20 Segment Performance (Source: Company Reports)

8common Announces CardHero Launch Following the Signing of EML Agreement: The company has recently announced that it has entered a 3-year agreement with 8common Limited (8CO) to create a CardHero branded reloadable card program. Under the agreement, the company will issue CardHero branded prepaid Mastercards in partnership with 8CO. This platform will address significant opportunities in the market and will deliver robust and integrated solutions to support enterprise operating requirements and large transaction volumes.

Future Expectations and Outlook: The company is emphasizing on the global application layer and is likely to develop one integration point with zero downtime deployments. It is anticipating an investment of ~$10 million to $15 million in FY21/FY22. EML is also evaluating buying opportunities for its product strategy and digital enablement across the globe. It is targeting investments in key features and is expanding access to 3rd party sales teams. The company is targeting growth sectors and is partnering with fin-techs for distribution.

With the ongoing uncertainty from the COVID-19 pandemic, the company suspended its guidance, but it is expected to resume its guidance in Q3FY21. The company expects stable segment yields and gross profit in FY21 and is likely to benefit from the synergies from the PFS acquisition in FY22. The company has re-affirmed its cash overheads guidance and expects it to be in between $64 million to $72 million in FY21. Underlying operating cash flows are expected to be 70-75% of EBITDA in FY21, and the internally generated software is expected to increase to ~$12 million to $16 million. Depreciation & Amortization expenses are expected to be in between $26 million to $29 million in FY21.

Key Risks: The company is exposed to a variety of risks including the credit risk, liquidity risk, market risk, including currency risks, interest rate risks and foreign exchange risks. The group is also susceptible to the risks related to litigation, risks specific to assets and cash-generating units, liabilities, market assessment of time value of money, etc. Apart from these, the company faced some disruptions from COVID-19 and may face continued impacts in FY21.  

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Despite the headwinds from COVID-19 pandemic, EML emerged as a resilient and rapidly growing company with a decent cash balance. It is implementing Project Accelerator to drive future growth, embracing product strategy and partnerships, and enhancing technology to become the preferred FinTech, driving digital change. As per ASX, the stock of EML gave a return of 10.18% in the past six months. This offers a decent opportunity for investors for accumulation. On the technical analysis front, the stock of EML has a support level of ~$2.402 and a resistance level of ~$3.549. We have valued the stock using the EV/Sales multiple based illustrative relative valuation and have arrived at a target price offering an upside of low double-digit (in percentage terms). Considering the current trading levels, decent returns in the past six months, modest long-term outlook, and resilient financial performance despite the softer market conditions, we recommend a ‘Buy’ rating on the stock at the current market price of $3.05, up by 0.66% on 8 September 2020.

EML Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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