Company Overview: EML Payments Limited, formerly Emerchants Limited, is a payments solutions provider of prepaid financial card products and services. The Company's segments include Australia Reloadable, Australia Non-Reloadable, Europe and North America. By using its payments software and processing platform, the Company provides its clients with financial service payment solutions for reloadable and non-reloadable prepaid card programs, in Australia, the United Kingdom and Europe, the United States and Canada. It offers various solutions, such as consumer lending, EachWay cash load solution and commercial solutions. It provides prepaid solutions, such as eml in their gaming account, and to deposit cash at a retailer for instant value in the gaming account. It delivers general purpose reloadable and non-reloadable prepaid card based solutions for clients across various industries.


EML Details

2017 was a transformational year for EML Payments, provider of prepaid financial services products, as the group experienced various developments with many other products and contracts already in pipeline. EML really performed well in first quarter of 2018 and is ahead of its budget, and historically this was the strongest quarter. It is continuously focusing on expanding its operations globally and also penetrating its B2B customer base. The group’s diversification strategy is auguring well with the efforts on footprint expansion across new geographies and business verticals.
 

1Q FY18 Performance (Source: Company Reports)
 
Acquisition of Presend Prepaid: EML acquired Presend Prepaid Solutions (Presend Nordic AB), a leading provider of Non-Reloadable solutions for shopping malls and city/town programs in Europe, principally in the Nordic and Baltic regions. The rationale for acquiring Presend was expansion of its geographic reach into the Nordic and Baltic regions in Europe given the gaps in the existing footprint, enabling EML to get an access to 6 out of 8 countries in which Presend operates. Financially, the acquisition represented a low upfront cash purchase price of SEK 10m (A$1.6m) (3xEBTDA) and a two-year earn out capped at SEK 60m (A$9.5m), 100% of which is payable in shares. The acquisition of Presend is thus not financially material and therefore it expects no earning contribution in the current financial year and approximately of $1m of incremental EBTDA in FY19. Presend currently outsourced its functions such as issuing and transaction processing, and these are functions are the ones which EML will be able to perform. Thus, digging a bit deep, EML is expected to witness a number of operational cost synergies to benefit from FY19 onwards.

Successful gaming partnership: EML had entered into a gaming partnership for its wholly-owned subsidiary EML Payments Europe Limited. Particularly, BETDAQ and EML entered into a multi-year agreement for the provision of branded reloadable cards. These cards can be used by BETDAQ customers so that they can have an immediate access of their winnings and can remit the funds back into their gaming account. BETDAQ brings together bettors from around the world and allows them to bet against one another, rather than using the odds set by bookmaker. The commercial terms and timing of the product launch have been in confidence and EML stated to provide an update to its shareholders at the appropriate time while the program is subject to standard regulatory, bank and scheme approvals.
 

Business Development (Source: Company Reports)
 
2017 a momentous year: During 2017, EML achieved its objectives of expanding the Company’s footprint across its new geographies and business verticals whilst introducing additional product capabilities and business solutions for its client. The launch of first Reloadable product in USA was a success and it is expected that it will load more than USD$1 billion in the current financial year. It signed a number of B2B Virtual Payments contracts in the USA and the most recent was with InfoSync which was announced in October. With establishment of the salary packaging vertical in Australia, it will provide its services to six salary packaging providers. It launched its first self-issued Reloaded program in Australia under a direct license with MasterCard. In fact, its North America business which was acquired in June 16 exceeded its investment case in the first full year of EML ownership.

New launches: EML had entered into a multi-year agreement with Fortuna Entertainment Group (Fortuna) for the provision of branded reloadable cards. Fortuna is the largest betting operator in Central Europe and is regulated in all markets in which it operates. It was an exciting development for the EML business as Fortuna was highlighted to be the first operator to launch these cards in Europe. EML is actively seeking opportunities to create, scale-up and enhance capability worldwide and it will continue its strategy of expanding the Company through its targeted acquisitions in addition to organic growth in key markets.

Financial Performance for 2017: During the year, the group invested $3.6 million in Pay With Worldwide, Inc so as to increase its stake to a diluted c.17% investment. The group incurred significant tax losses, primarily in Australia and USA which will be utilized in future periods and are recognized as a deferred tax asset. Its operating cashflow included approximately $7m of breaking receipts which had not been paid out to its customers under its revenue sharing agreements, so excluding this amount, operating cashflow was $12.3m. Cash and Cash equivalent as on 31 December 2017 was $39.9m which is a 48% increase on the prior year. The group expects to adopt AASB15-Revenue from Contracts with customers in FY19. EBTDA also improved significantly on prior year and was recorded at $14.5 million. The Revenue/Gross Debit Volume (GDV) metric reduced to 1.3% which was due to a shift in mix from Non-Reloadable products to Reloadable and Virtual Payments which generated $2.49 billion of total GDV.
 

Financial Performance (Source: Company Reports)
 
2018, a business development year: EML expects to complete development of the Pays (Apple Pay, Samsung PAY and Android Pay) and VISA integrations in all regions by FY 18. It will offer the full range of its functionality to all Reloadable customers from FY19 onwards. It also expects to incur approximately $0.75 million of one-off costs associated with its developments. EML is planning to launch various gaming programs in 2HFY19. Further, 4 European gaming operators also signed an agreement with the group and gave an access to 12 countries, while the group expects to sign several more agreements prior to the end of FY18 to be on track with its growing European mall business. It will also increase its business development spend in B2B Virtual segment in the USA from January onwards and will have an impact of $1-$1.5 million per annum. On the other hand, signed contracts in B2B Virtual segment can get converted to US$1.8-$2.4 billion in GDV over the FY19-21 period, at an expected 50-100 bps conversion range. In Q1FY18, GDV’s conversion rate to revenue was approximately at 90 bps and group expects that it will reach 100bps by the end of H1FY18.
 

Q1FY 18 GDV Performance (Source: Company Reports)
 
Launch of various gaming programs in 2HFY18 has been planned with efforts on continued penetration into B2B customer base along with executing USA GPR programs. FY18 is thus expected to be a year of continued execution in business development and onboarding in key sales segments.

Efforts to curb concerns on sale of EML shares by Directors: Company is trading ahead of its budget and its prospects for continued strong growth and increasing profitability look encouraging for FY 18 and in the future. Looking at the sale of EML shares by directors Tom Cregan and David Liddy in November last year and to curb the concerns of the shareholders, EML Board has planned to adopt a policy with respect to how share sales by Director must be conducted. The policy will address on the matters like how Directors may only sell EML shares when the sale is managed as an-off-market sale by appointed brokers and it occurs immediately after a trading window is opened in accordance with the Company’s Trading Policy and for this a coordination and communications protocol will also be included in the policy. This policy is expected to ensure a full transparency for its shareholders in the future.

Stock Performance: The market cap of EML has been up significantly in the past one year while return on equity has been almost flat around 0.0% against 2016 ROE of 0.1%. The stock has climbed by 7.65% in last six months as at February 12, 2018 but fell about 17% in past three months. The significant uplift in GDV loads is expected to drive first half performance and beyond. More insights will be provided in the 1H18 result which is due on 20 February 2018. Further, contract wins of previous years are expected to be the catalysts for FY18 and beyond. Particularly, relationship with Fortuna Entertainment in Europe and six Australian salary packaging companies, including McMillan Shakespeare, will be key for future growth. Moreover, US based virtual payment contracts that include Wide Open West and Sprint are expected to boost GDV. We give a “Speculative Buy” on the stock at the current price of $1.80
 

EML Daily Chart (Source: Thomson Reuters)

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