This Fintech Player is smashing the index with good gains – EML

EML Payments Limited (ASX:EML) issues prepaid financial cards for gaming and commission payouts, healthcare reimbursements and government disbursements. The Company was established in 2001 and is headquartered in Brisbane, Australia. The Group operates in about 28 countries with 468 employees and expects its digital payments business to grow amid COVID-19.

On 20 May, the S&P/ASX200 gained 0.24% ending at 5573 and on 21 May 2020, the same index was trading at 5583.2, up by 0.18% (at AEST 11:10 PM). EML Payments was one of the biggest movers which rallied 12.77%, to close the day at $3.71 on 20 May. On 21 May 2020, EML was trading at $3.74, up by 0.809% (at AEST 11:09 PM).

Source: ASX

The shares of EML payments have risen 179%, from $1.33 on 23 March to $3.72 on 20 May 2020, showing investors interest in the stock after it announced its trading update.

Solid performance in FY20

The Company continued to deliver solid results in FY20 despite the coronavirus pandemic. Unaudited trading results for nine months to 31 March 2020 are mentioned below:

• Revenue rose by 20% on the prior corresponding period (pcp) to $87.1 million
• Gross profit margin increased from 73.7% in pcp to 75.9%
• EBIDTA recorded a growth of 24% over pcp in 9 months reaching to $27 million
• Operating cash flow over the period was $27.3 million, an increase of $18.2 million over 1HFY20 showing EBITDA conversion rate of 101% due to breakage receipts from gift cards sold in the prior year.

Revenue from the mall gift cards represented 65% of the group revenue for H1FY20, which was expected to be 55% for the full year prior to coronavirus outbreak. EML suspended its earnings guidance in March due to uncertainty on easing of lockdown and reopening of the economy.

The upward trajectory in April

In November 2019, EML announced its acquisition plans of Prepaid Financial Services Limited (PFS), a European provider of white-label payments and banking-as-a-service technology, for an upfront payment of $423 million with an earnout component for 3 years of $103 million funded through a combination of cash ($250 million equity raising), EML shares and an underwritten debt facility.

EML acquired PFS on renegotiated terms on 1 April through the discounted upfront payment of $252.3 million that included a cash payment of $159 million which will be funded entirely by EML’s cash reserves worth $278 million.

PFS acquisition, consolidated on 1 April, was the central plank in its strategy to rebalance revenues. With the addition of PFS, EML now operates a more diversified business and a business that has pivoted to generate the majority of its revenue from GPR products.

• Gift and incentive (G&I) segment fell by 53% on pcp, witnessing GDV of $31.4 million while the Virtual Account Number (VANS) segment was up 9% with GDV of $612.5 million
• General Purpose Reloadable (GPR) segment grew GDV by 26% on pcp to $286.5 million excluding PFS acquisition, driven by Salary Packaging and resilient online gaming
• PFS volumes were up 13% on pcp and contributed $395.3 million of GDV
• Unaudited EBIDTA for April including PFS was $2.7 million

The management anticipates improvements to April trading conditions through the gradual opening of malls in various countries in May and June 2020. The Company is well-positioned to tackle the present challenging period. However, the interest the Group earns on stored value float balances is being impacted by falling interest rates of Central Banks and negative interest rates in some countries.

Sale of Shares by Chairman

EML Chairman, Peter Martin planned to sell between 300k to 400k shares reflecting a small part of his total stake holding between 20 May and 31 May 2020. He acquired his initial stake in 2012 and now holds 7,718,992 fully paid ordinary shares. This included Mr Martin’s participation in 2019 entitlement offer in support of the acquisition of PFS (Ireland) Limit.

He expects to remain a substantial shareholder of EML for years to come, however, given his stage of life, family and other needs, he is likely to sell some shares each year.

Growth path

EML plans to continue operating cash inflows from breakage on gift cards sold twelve months before as the contract asset of $36.8M translates to operating cash inflows. About 75% of the contract asset will be discharged into operating cash within 12 months.

EML has invested in a software platform named EML Connect, enabling mall customers to extend further their sales.EML also launched PAYS technology, where a digital gift card is delivered directly to a mobile device. PAYS was used to launch multiple new programs for FMCG companies like Vault (AU), epay (USA), Incomm (EU), Virtual Commerce (USA), BFM Group (USA)and Clevergift (EU).

EML and PFS have collaborated and commenced several integration projects and expect to complete those over the next 24 months. Net run-rate synergies of $6m are scheduled to begin in FY22.

In the BNPL space, EML launched a pilot program with ZIP and signed a contract with Sezzle Inc.(ASX:SZL) to start in the North American market. EML has also been signing multiple contracts since 1 January 2020 reflecting its persistent investment and activities in the business.

EML has a robust balance sheet to weather any downturn in business and the financial capability to invest in its growth. Hence, the firm is well placed for long term value creation.

(NOTE: Currency is reported in Australian Dollar unless stated otherwise.)