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 which 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 

 
Signing of New Contracts and Significant Growth Opportunities: EML Payments Limited (ASX: EML) is a financial services company which is specialized in stored value products and provides prepaid payment services in Australia, Europe, and North America. As on 12 May 2020, the market capitalization of the company stood at ~$1.23 billion. During FY19, the company reported an increase of 34% in group GDV (Gross Debit Volume) to $9.03 billion and a growth of 37% in group revenue to $97.2 million. The growth in revenue was evident in each segment, with an increase of 42% in revenue of G&I segment, an increase of 11% in GPR segment and 165% increase in VANS segment. In the same time span, the company reported a record underlying EBITDA of $29.1 million, reflecting an increase of 40% on the pcp. EBITDA growth of the company has exceeded 30% in each of the last three years. The group is well placed for continued future growth, driven by continued growth in GDV, synergies from Flex-e-Card acquisition, improvement in gross margins and continued focus on reducing costs. The 2019 financial year saw a continuation of EML’s progress with respect to signings of new contracts, implementation of new programs and product development.  The company has built a strong foundation for its payment solutions capability. The global footprint of the company is expected to drive expansion in the coming years. EML ended the year with a strong balance sheet with a cash balance of $33.1 million and highly conservative gearing with total debt less than half of the cash. This provides flexibility to the company for future acquisition opportunities given the strong underlying operating cash inflows for the year of $22 million. Over the span of 4 years from FY15 to FY19, the company has witnessed a CAGR of 61.07% in revenue and a CAGR of 59.51% in gross profit, indicating continued delivery on financial, strategic, and operational targets.

The company has also released its interim results for the period ended 31 December 2019 wherein it saw signing of the new contracts and program implementations. The company stated that it had entered into a five-year agreement to provide branded General Purpose Reloadable card programs for the payout of Salary Packaging benefits to NSW Ministry of Health, adding a further 50,000 accounts to transition within 12 months.

The company has delivered against every metric during FY19 both in financial terms as well as organizational terms. EML has demonstrated business growth and can self-fund significant investments whilst providing strong returns for shareholders.


FY19 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. Challenger Managed Investments Ltd. is the largest shareholder in the company, with a percentage holding of 7.54%.  


Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Increased Profitability and Stable Balance Sheet: During 1H20, gross margin of the company stood at 75.7%, higher than the industry median of 62.9%. In the same time span, EBITDA margin was in line with the previous half and stood at 24.3%. During 1H20, net margin of the company witnessed a YoY increase and stood at 7.3%, up from 5.4% in 1H19. The increase in gross margin and net margin indicates that the company is managing its costs well and is capable of converting its revenue into profits. During the half-year, ROE of the company stood at 1.6%, broadly in line with the ROE in 1H19. During 1H20, current ratio of the company went up to 1.55x, up from 1.05x in 2H19. This indicates that the company is liquid enough to pay off its current liabilities using its existing assets. In the same time span, Assets/Equity Ratio went down to 2.26x from 3.31x in 2H19, and Debt/Equity Ratio of the company stood at 0.02x, lower than the industry median of 0.32x. This indicates that the business is financed with a significant proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet.


Key Margins (Source: Refinitiv, Thomson Reuters)

Record 1H GDV, Revenue and EBITDA: The company has recently released its results for the half-year ended 31 December 2019 wherein it reported record first-half GDV of $6.62 billion, an increase of 59% on the pcp. Whilst this volume translates to revenues at different rates depending on the program and region, GDV is a proxy indicator of customer demand for the company’s payment services. EML has also reported record revenue of $59.2 million, reflecting a growth of 25%. However, revenue yield fell at a group level due to GDV mix shift to VANS (Virtual Account Numbers) segment. In the same time span, the company hit the record H1 EBITDA at $19.7 million, up by 42% on 1H19. During the half-year, the company emphasized on numerous operational highlights including the expansion of its first gaming payout program in the United States with Pointsbet, and the second with bet365. During 1H20, EML reported a strong and stable balance sheet with no debt and cash in hand of $256.8 million. The company has also raised approx. $241.6 million net of costs in connection with the acquisition of Prepaid Financial Services.


Growth in EBITDA (Source: Company Reports)

EML Completes Acquisition of PFS: The company has recently announced that it has completed the acquisition of Prepaid Financial Services (Ireland) Limited at renegotiated terms with upfront enterprise valuation of GBP131.5 million. This acquisition will result in a rapid shift of EML to a General Purpose Reloadable business, which has been a multi-year strategy. The combined group is likely to benefit from increased scale, a more diversified revenue and earnings base and a robust platform for long term growth, with added capabilities to capitalize on future potential M&A opportunities.

Future Expectations and Growth Opportunities: The company will continue to grow volumes by identifying opportunities offering significant payment volumes. It is also likely to benefit from customized payment solutions to improve their offerings or current processes. EML expects a substantial increase in the volumes associated with Reloadable products in the coming financial years and is targeting clients in high volume industries. Though the current trading environment is unpredictable due to global pandemic, EML appears to be well placed for long term opportunities. The company will continue to launch new programs and sign new contracts which are expected to generate incremental revenue in FY21 and beyond.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: P/BV Multiple Based Relative Valuation Approach (Illustrative)

Price to Book Value Multiple Based Relative Valuation Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: As per ASX, the stock of EML is trading close to the average of its 52-week trading range of $1.2 - $5.7, proffering a decent opportunity for accumulation. Considering the impact of COVID-19, the group will make appropriate adjustments to lower expenses and improve cash flow conversion. Given the diversification in the revenue and earnings profile of the company, it is likely to benefit from increased opportunities in the upcoming years. Considering the trading levels, improvement in margins, decent financial performance, and positive long-term outlook, we have valued the stock using a price to book value multiple based illustrative relative valuation approach and have arrived at an indicative target price with an upside of lower double-digit (in percentage terms). For the said purposes, we have considered Tyro Payments Ltd (ASX: TYR), Credit Corp Group Ltd (ASX: CCP), Prospa Group Ltd (ASX: PGL) etc. as peers. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of $3.4, down by 2.299% on 12 May 2020. 
 
 
EML Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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