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

Strategic Investments will Drive the Topline Growth: EML Payments Limited (ASX: EML) ended FY 2018 on a strong note and was primarily aided by organic growth in the revenues. The company generated revenues amounting to $71 million which implies the YoY growth of 23%. The company has its strong footprint at the international level as the management stated that, of the total revenues, 75% was garnered offshore. The company generated GDV or Gross Debit Volumes of $6.75 billion in FY 2018 and was supported by the sale segments as well as regions. Further, the management of the company stated that robust momentum was visible in the Australia region because of the rollout of reloadable programs with respect to Salary Packaging industry as well as because of favourable momentum in the reloadable programs with respect to the online gaming industry. However, the company’s gross margin in FY 2018 witnessed a marginal decline on the YoY basis mainly because of the product mix. On the analysis front, the Company has achieved a five-year compound annual growth (CAGR) in revenue of 70% to FY18 while GDV recorded CAGR growth of 119% percent over the five years (FY14-18). The topline growth was mainly driven by the significant growth in processing payment volumes of prepaid stored value products on its processing platforms during the period. Further, the company witnessed EBITDA growth of 247 percent over the last five years up till FY18. Based on robust performance, the company will continue to invest in its proprietary processing platform to support Apple Pay, Google Pay, and SamsungPay which will strengthen the group’s business model and growth objectives. In our view, this strategic investment will drive the top line growth of the company in the upcoming period.

 
GDV and Revenue Trend (Source: Company Reports)

What Impacted North America Operations: EML Limited’s management stated that, in FY 2018, they encountered challenges with respect to the shopping mall segment because the sector saw lower footfalls because of the e-commerce growth as well as closures of the retailers. The management believes that macro variables related to the segment would continue to act as headwinds. However, they would be employing account management strategies so that the products which are innovative can be given to the customers which would help in maximizing the returns.

 
North America’s GDV (Source: Company Reports)

EML’s Balance Sheet, US Gaming Update: The management of EML Payments has also thrown some light on the balance sheet. The company ended FY 2018 with total cash as well as cash equivalents amounting to $39 million, and it also is debt-free. As at 30 June 2018, Current ratio stood at 1.85x. The significant cash available places the company in a strong position as it would be able to deploy the same in the inorganic as well as organic prospects for the growth. The activities have been adopted in several US states which focus on the legalization of the sports wagering.

As per the company, the land-based entities which include places like casinos and which are regulated are coming forward and joining hands with the companies which are having a business of sports wagering. These partnerships are being done so that the companies can come up with their operations. All these initiatives have the potential to positively impact the business of EML Payments.

Acquisitions Impacted Investing Cash Flows: The management of EML Payments stated that they have witnessed strong investing cash outflows because of the PreSend Nordic AB acquisition. With the help of this acquisition, the company has managed to increase its footprint geographically in regard to six Nordic and Baltic countries. Additionally, the company also reflected the favourable views in regard to the Perfectcard DAC acquisition. The management of EML believes to realize cost as well as regulatory synergies. Moreover, it also has plans to increase the presence of corporate expense solution worldwide. Notably, in Q1 FY 2019, the company managed to generate gross debit volumes amounting to $1.82 billion which reflects the growth of 10% on the YoY basis.


EML’s GDV in Q1 FY 2019 (Source: Company Reports)

Partnerships, Strategic Acquisitions to Support EML Moving Forward: In FY 2018, EML has entered into numerous business partnerships which would positively impact the company in FY 2019 and thereafter. The business partnership with ECE, which is in the business of operating the German shopping malls is expected to impact EML favorably. With this partnership, the company expects annualized GDV of around $142 million and, as per the management, it would be rolled out in Q2 FY 2019. The EML’s management also reflected positive views for the reloadable program which was rolled out in the US in April 2017 as this program has substantially aided the company’s Gross Debit Volumes. Additionally, the company has managed to enter into new as well as fresh deals relating to reloadable programswith the ImpactPay, Wildcard, Instabank (Norway), QPay as well as MyCryptoWallet. All these have the strong potential to deliver substantial opportunities for the growth in FY 2019 and for years to come.


Strong Partnership Portfolio (Source: Company Reports)

Drivers for Future: EML Payments is well-positioned to witness robust growth momentum moving forward. The company is expected to garner EBTDA or earnings before tax, depreciation and amortization between A$26-28 million in FY 2019. The company expects that it would be significantly benefited by the giant German malls. As per the management, the company is expected to encounter lower Gross Debit Volumes in regard to North American malls. However, increased interchange revenues, as well as higher revenues with respect to VANS segment, are expected to be positively impacted.   

Further, the management of the company is of the view that the rollout of gaming programs in the US as well as in EU would not be largely beneficial in the FY 2019. Additionally, Caesars program would also be contributing less moving forward. The company is expected to witness higher overhead costs because of the acquisitions as well as new hiring. However, the company is expected to report revenues between $82-$88 million. Moving forward, the company is expected to remain committed towards targeting the inorganic as well as organic opportunities. In our view, the company is expected to get benefited in the long term by its strategy of diversification. The company possesses diversity with respect to the currencies, sources of the revenues, customers as well as geographies.
 

EBTDA Guidance for FY19 (Source: Company Reports)

Other Key Updates: On November 14, 2018, EML Payments made an announcement that its present CFO or chief financial officer named Bruce Stewart would be stepping down and has been on the position for the past seven years. The new CFO named Robert Shore has also been given the charge, and the role became effective on the same day. The new CFO comes with the strong experience, and he has also been on the senior finance roles in the companies which are listed in the UK, US as well as in Australia. The new CFO of the company happens to be the CA or Chartered Accountant, and he has also completed his MBA from MGSM or Macquarie Graduate School of Management.

Stock Performance: EML stock has fallen 17.91% in the past three months (as at November 26, 2018) and traded slightly above the average of 52 week high and low prices of $1.5575. On the technical analysis front, two technical indicators have been used on the daily chart of EML Payments Limited and, for the purposes, the default values have been considered. After analyzing it was seen that the MACD line has just touched the signal line and might move upwards. If it moves upwards, a bullish momentum would be witnessed. Also, the stock price has crossed EMA and is moving upwards which reflects the bullish momentum. However, the company is exposed to certain headwinds moving forward like higher costs because of the acquisitions as well as new hiring, and the company might encounter certain challenges with respect to the North America operations as discussed above. The future drivers and improved financials indicate for a better earnings scenario in FY19 with a potential single digit to double digit upside expected in stock. Therefore, based on the aforesaid in view of certain headwinds, we give a “Speculative Buy” recommendation on the stock at the current market price of A$1.600 (up 7.383% on 27 November 2018).
 

EML Daily Chart (Source: Thomson Reuters)

 
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