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 Payments Ltd (ASX: EML), formerly known as Emerchants Limited, is a small cap company with market capitalization of $390 million, and is the payment solution provider of prepaid payment services in Australia, Europe, and North America. Through its payments software and processing platform, the company offers its clients with financial service payment solutions for reloadable (gaming cards etc.) and non-reloadable prepaid card (gift cards etc.) programs. The group now has better focus on reloadable cards in the corporate sector and this stream provides annuity like revenue while the group is undertaking expansion in target markets over the medium term. New contract wins and products and services add to the portfolio. The group is experiencing earnings growth with diversification across various businesses and is now looking at potential in the European reloadable market with the company signing Bet365 UK. Net cash position of $39 million as at FY18 is also decent while margin is expected to get a drive from B2B virtual payments segments into the US.


Performance over the years (Source: Company Reports and Thomson Reuters)

Record Performance in FY 18: EML for FY 18 has reported 23% growth in the revenue over the prior year to $71.0m. The company has generated 75% of revenues offshore and 92% of revenues were recurring in nature (that excludes one-time establishment fees). The company’s revenue growth was majorly organic in nature, on the back of an increase in Gross Debit Volume (GDV) to $6.75 billion. GDV grew 53% in FY 18 across all regions and sales segments. Australia had contributed significantly to the growth due to the launch of Reloadable programs in the Salary Packaging industry and also due to the solid growth from the Reloadable programs for the online gaming industry. The company has ended the year 2018 with a 36% increase in the Stored Value balance at $411.0m and positive growth in all regions. In 2018, Europe grew their Reloadable product for online gaming with bet365 UK and  Non-Reloadable grew due to new customers such as Dundram. Meanwhile, in 2018 North American malls had experienced challenging trading conditions as strip malls were disproportionately affected due to eCommerce and retailer closures. GDV growth has exceeded revenue growth due to the company’s B2B segment, that includes processing only programs earning 5-10bps and the Reloadable program with LuLaRoe which generates 20-30bps on GDV. The company has witnessed 43% increase in EBITDA to A$20.8m, with all regional business units generating EBITDA growth and improving against the prior year. Australian EBITDA has grown from negative $0.2 million to a positive $3.5 million in FY18, therefore it is the first year that Australia has generated positive EBITDA since the company got listed in FY12. Europe grew its EBITDA 25% to $5.6 million, however it did not include the impact of the new German mall deal, and a number of online gaming customers that company had announced but not launched, like GVC, Fortuna, Betsson. North America EBITDA has increased by 14% to $11.6 million. However, in FY 18, the gross margins fell marginally from the prior year to 75% compared to 76% in 2017 primarily due to product mix. The continued growth of the Reloadable vertical in Australia, Europe & North America has resulted in a slightly lower gross margin. The company expects gross profit margins to improve in the longer term, as the Reloadable products move to Self-Issuance in Australia & Europe. Moreover, EML’s second half operating cash inflows of $9.7m were in line with the company’s expectations after significant one off cash outflows in the first half, carried over from FY17, which posted negative operating cash flows of $(3.5m). The company’s underlying operating cash inflow for the year 2018 is of $15.7m or 75% of EBITDA while the cash has fallen by 2% to $39.0m in 2018.


FY 18 Growth over FY17 (Source: Company Reports)

Strategic Acquisitions: EML has acquired 74.86% of Perfectcard DAC (Perfectcard), which is Ireland’s first authorised eMoney institution and a FinTech company that provides incentive and corporate expense solutions for the total maximum acquisition price of €6,023,841 (A$9,561,652).Having an Irish eMoney license will allow EML to self-issue regulate the payment products across the European Union without the need for the external third party bin sponsors that EML requires currently. Perfectcard will offer EML with an excellent corporate expense (pecan) and corporate incentive solutions. In FY19, after first year of integration costs, Perfectcard is expected to contribute approximately A$400k - A$600k in EBTDA to the Group (74.86% ownership). Previously, EML had acquired 100% of Presend, which is a leading provider of Non-Reloadable solutions for shopping malls and city/town programs in Europe, principally in the Nordic and Baltic regions. The company is looking forward to expanding the geographic reach into the Nordic and Baltic regions in Europe. EML has completed Integration by August 2018 including rebrand to EML Nordics. The integration of Presend onto EML’s platforms from FY19, will allow the company to leverage EML's treasury services and Mastercard private label BINs which is expected to increase revenues on its cards programs. Presend currently operates in 11 countries, in which EML had no presence in 6 countries. This provides a good base for EML to expand through existing EML infrastructure that allows the Group to continue to scale.

U.S. Supreme Court overturned the 1992 Professional and Amateur Sports Protection Act: The U.S. Supreme Court has overturned the 1992 Professional and Amateur Sports Protection Act that outlawed the operation, advertisement, and promotion of sports gambling. This ruling has cleared the way for many states to allow gambling on sports events. This is a positive news for sports betting companies and EML Payments, as US is one of the significant markets for the company. EML Payments is the provider of payment technology solutions for payouts, gifts, incentives and rewards, and supplier payments. Betting companies such as Crownbet, William Hill, Ladbrokes, bet365, and Sportsbet use the service of EML Payments, which provides their customers with reloadable debit or virtual cards that allow them immediate access to winnings.

Launch of ECE – German Malls Program: EML has signed a five year agreement with ECE, one of the largest and most esteemed shopping mall organisations in Europe, to provide a Non-Reloadable gift card program for 87 of their German shopping malls. EML anticipates to generate approximately A$142m of annualised GDV. This program is expected to be launched in October 2018, and will be issued by Perfectcard DAC. However, this opportunity was previously announced in February 2018 as a Letter of Intent, that is subject to regulatory & contract approvals has now been finalised. Further, the program with ECE will increase the mall program portfolio to over 310 malls and will increase the gross debit volume in the mall segment by over 60%. EML expects the annualised Gross Debit Volume (‘GDV’) for this program to be approximately €90 Million (AUD$142 million).

Launch of European gaming Programs: In FY18, EML had signed agreements with several major gaming customers comprising of Fortuna & GVC that are expected to launch Reloadable programs in FY19.

Multi-Year Agreement with GVC Holdings PLC: EML has signed multi-year agreement with GVC Holdings PLC for the provision of branded reloadable cards for their European online gaming brands. GVC customers can use the cards to immediately access their winnings and remit funds back into their gaming account. GVC was signed in late June 2018, and expected to be launched within FY19.


Growth drivers for FY19 (Source: Company Reports)

Neobank & crypto currency programs and other updates: Neobank & crypto currency programs are expected to be launched in FY19, including the company’s first Reloadable product in the Nordics. Meanwhile, EML has appointed three senior executives. Mr. Paul Wenk is appointed under the executive team as Group General Counsel, Ms. Kristen Shaw is appointed under the executive team as the Company’s first Chief People Officer, and Mr. Jamison (Jamie) Jaworski is appointed as the executive team as President EML North America.

Stock Recommendation: Meanwhile, EML stock has risen 4% in three months as on October 15, 2018. The stock has support at $1.43 level and resistance around $1.9 with prospective breakout that may be witnessed at the back of key growth catalysts. Australian EBITDA has grown from negative $0.2 million to a positive $3.5 million in FY18, therefore it is the first year that Australia has generated positive EBITDA since the company got listed in FY12. The company has delivered strong performance in FY 18, but its margin declined and cash decreased, although the scenario still looks manageable. While EML is yet to work on free cash flow enhancement, continual rise in revenue and better fundamentals finding support from various partnerships are expected to boost the stock. Given the scenario, forward 5 year EPS Growth is expected in early double digit. Primarily, FY19 forecast risks related to transition from gift cards etc., seem to slightly fade away with many mall and gaming contracts being won and the same provide FY19 support with US rate-rise cycle (basis interest rate hikes in FY19) also expected to help the scenario. The EV/EBITDA for FY19 is expected around early double digit giving upside to financial parameters on earnings front for next three years or so. Based on the foregoing, we give a “Speculative Buy” recommendation on the stock at the current price of $ 1.57, ahead of the annual general meeting planned for next month.

 
EML Daily Chart (Source: Thomson Reuters)

 
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