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 treasury, and compliance and fraud management. EachWay cash load solution allows customers to convert cash to value 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

EML, a growing ASX listed FinTech company that is broad-based issuer and processor of prepaid financial cards, has different kinds of products ranging from reloadable cards through to traditional, single-store gift cards and operates in an expanding market and provides prepaid financial products that are supported by strong technological functionalities. The Company’s focus is to grow its business and in turn deliver superior returns for its shareholders. It operates on a multi-pronged growth strategy and aims to deliver better shareholder returns through acceleration of existing product suites, funding the research and development for launching new products, negotiating strategic alliances with key clients and industry participants, pursuing acquisitions of complementary businesses, and efforts on international expansion. Its portfolio offers innovative payment technology solutions for pay-outs, gifts, incentives and rewards, and supplier payments. The recent launch of Total Rewards Payments Card in the Caesars Palace Casino of Las Vegas was a good move and has set an example of EML’s creativity in coming up with a payment solutions catering to a variety of business needs ranging from paying suppliers and employees, and providing customers with reward programs and gift cards. The group aims to expand this effort across further properties.


EML Timeline (Source: Company Reports)

Launch of Caesar Casino’s Total Reward Program - The Group operates a Total Rewards program which allows and gives an opportunity to earn Reward Credits from activities arising from casino gaming and from entertainment activities at about 40 destinations around the country. With Total Rewards, one can also earn Reward Credits through its TR Partners. Everything from dining at the casino to a round of golf to shopping online, one can earn next great reward. Recently, EML’s wholly owned North American subsidiary launched the Total Rewards Payments Card in the Caesars Palace Casino in Las Vegas, Nevada in partnership with EML’s partner PayWith Worldwide, Inc. This was an innovative point program which was launched to enhance the customer loyalty and engagement.


EML salary packaging (Source: Company Reports)

It will help customers to link specific Total Rewards funding sources and to receive 2X Rewards Credits on all purchases that are made with the Payments Card. One will be able to redeem these points within Caesars casino for gambling or on premise entertainment. The Group doesn’t expect that the launch of the Caesars program will materially impact earnings in the Financial Year ending 30 June 2018 for which EML has already provided guidance. As of now, the Group is yet to estimate future Gross Debit Volume (‘GDV’) that will be derived from this program. It expects that the GDV to revenue conversion ratio will be in line with other Reloadable card programs that the group already operates.


Gross Margin Performance (Source: Company Reports)

Positive Outlook - The Company is currently managing 1,100 card programs in 19 countries and its Group GDV increased by 86 per cent in HYFY18 as compared to the same period in the corresponding half. EML has always invested in growth verticals and future opportunities through product and technology innovation. It continues to actively investigate and discover new market niches in the FinTech Industry across all regions, recognising its business units that evolve independently of each other and derives its success through customer value. EML enables McMillan Shakespeare, AccessPay, Paywise, Eziway and Salary Options to offer a tax compliant product to their customers including Mobile Merchant Rewards. Its success is derived through some key drivers like Non-Reloadable cards and revenues from these are derived through breakage, interchange and interest income on the stored value float. The second driver is Reloadable, EMV-enabled prepaid debit cards and revenues from these are derived through transaction fees and interest income on the stored value float.


Financial Performance Drivers (Source: Company Reports)

The third driver is B2B Virtual Payments and revenue is flown through interchanges. Looking at the latest financial performance, Gross Profit Margin was 75.1 per cent in HYFY18, down from HYFY17 but was in line with its AGM guidance as the product mix shifted towards Reloadable and B2B Virtual Payments and overheads were down by 8 per cent of revenue, and improved as the group continued to see leverage on its growing scale as it grew both organically with new & existing customers and via acquisition including Presend. It will diversify its revenue streams by minimising concentration risk in any one region, segment or customer. Since inception, GDV and Revenue have grown faster than expenses that resulted in EBTDA margin expansion (1H2015 - 11% increasing to 35% in 1H2018). The Group reaffirmed its February guidance and expects that GDV in FY18 will be in the range of $6.7 billion – 7.0 billion with a Gross Profit Margin of 75 per cent and cash overheads to be in the range of $31-$32 million. It expects that EBTDA will be within the range of $19.5 million - $21.5 million in FY18 (formal guidance yet to be issued though). EML aims for gross profit margin of 80% in the long term.


Source of Revenue (Source: Company Reports)

Other Updates - IOOF Holdings Limited changed its substantial holding in the Group and now holds 9.23 per cent of the voting power, up from 7.918 per cent since 25 May 2018.  The Company issued 130,000 fully paid ordinary shares upon the exercise of 130,000 options held by certain employees of the Company’s UK/EU business. The Business made some changes in its gift card schemes and made a mandatory minimum expiry period of 3 years and banned the post-purchase administration fees. These changes will only affect a small portion of EML’s Australian gift card business as over 80 per cent of Australian Non-Reloadable Gross Debit Volume is derived from corporate-funded incentive card programs which are exempt from these legislative changes. The Group is working towards the compliance of this new legislation and targets to complete it prior to the end of the transition period on 30 September 2018. The Group appointed Mr Brandon Thompson as its Chief Commercial Officer, who has a wealth of experience in the Prepaid financial services industry.


Timeline for Product and Technology (Source: Company Reports)

Stock Performance - EML enables its partners including Sportsbet, CrownBet, Ladbrokes and bet365 to drive loyalty while giving their customers instant access to the funds. The Group enables its customers to deliver value and drive revenue into their business. It recently launched a program that merged points, loyalty, rewards, gifts and payments into a mobile app and a single card. It is taking its Mobile Merchant Reward Program to the malls to drive consumer engagement and ensure ongoing relevance. EML will be the first non-bank self-issuer in Australia providing a secure alternative to cash or card payments. Since inception Breakage rates have remained consistent with no significant adverse impacts from regulatory or market changes. It is believed that the interest income might gradually rise with higher interest rates expected across Europe and in the United States in the upcoming periods in view of the stored value these regions have. Overall, EML operates in large, fast-growing markets and holds a relatively small market share, offering significant market potential in future years. Its ROE improved from 1.1 per cent in December 2016 to 1.7 per cent in December 2017 and whereas ROIC improved from 1.1 per cent in December 2016 to 1.6 per cent in December 2017. The share prices declined by 30.54 per cent in last six months but improved by 8.44 per cent in last one month. The long-term weakness in stock price was owing to the flared expectations of the market on its half year result. With latest developments, the stock went up by 2.80 per cent in last five days. We give a “Speculative Buy” recommendation on EML at the current market price of $1.30 by looking at the rising demand for Open Loop and Virtual Prepaid Payment Cards and the broader shift towards non-cash payments.
 

EML Daily Chart (Source: Thomson Reuters)

 
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