Sezzle Inc.

SZL Details

Strategic Partnership with the US Company:  Sezzle Inc. (ASX: SZL) is a growing fintech company, which operates a payment platform. Recently, the company has inked an agreement with Alliance Data Systems Corporation, a leading global provider of data-driven marketing, loyalty, and payment solutions in the US.

• Under the terms of the agreement, Alliance Data’s Bread business would offer its pay-over-time installment loan product via the merchant network of Sezzle.
• As a result of the said agreement, both Bread and Sezzle would be allowed to expand their reach and unlock mutual growth.

Q3FY21 Financial Highlights:

• Growth in Active Merchants and Consumers: During the quarter ended 30 September 2021, the company experienced decent performance, evident by the growth of 112.5% and 77.9% in active merchants and active consumers to 44,400 and 3.2 million, respectively, on a YoY basis.
• Increasing UMS: The company recorded a rise of 101.9% in Underlying Merchant Sales (UMS) to US$460.7 million on a YoY basis. This was underpinned by growth in Active Consumers, Active Merchants, and increasing consumer engagement.
• Rise in Total Income: Total Income for the quarter soared by 78.9% to US$28.5 million against US$15.9 million in Q3FY20. However, total income as a percentage of UMS went down by 50 bps as compared to the Q2FY21, as enterprise merchants are becoming a larger percent of SZL’s transactions.

Active Merchants Trend (Source: Analysis by Kalkine Group)

Key Risks:

• Credit Risk: The company’s operational and financial performance could be impacted by failure done by counterparties in fulfilling their obligations.
• Regulatory Risk: SZL is exposed to a more complex regulatory environment as it operates in financial transactions. Any failure in maintaining compliance could lead the business to fines, penalties, etc.

Outlook:

• The company anticipates UMS to attain an annualized run rate of more than US$2.5 billion by the end of 2021.
• SZL is well-capitalised for future growth, backed by available credit of US$87.77 million at the end of Q3FY21.
  

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of SZL is trading near to its 52-week low level of $4.750, offering a decent opportunity for accumulation. The stock of SZL has been corrected by ~20.69% and ~40.71% in the past one and three months, respectively. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight discount to its peers’ average EV/Sales multiple, considering the COVID-19 disruptions, rise in marketing expenditure, and negative ROE, etc. For the purpose of valuation, peers such as Tyro Payments Ltd (ASX: TYR), Laybuy Holdings Ltd (ASX: LBY), Splitit Ltd (ASX: SPT), and others have been considered. Considering the indicative upside in valuation, partnership with the US company, growth in active merchants and consumers, deleveraged balance sheet, decent outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of $4.760, down by ~3.055% as on 10 November 2021.

SZL Daily Technical Chart, Data Source: REFINITIV 

EML Payments Limited

EML Details

Change in Substantial Holdings: EML Payments Limited (ASX: EML) is engaged in the provisioning of prepaid payment services in Australia, Europe, and North America. On 29 October 2021, Mitsubishi UFJ Financial Group, Inc. has made a change to holdings in the company with a current voting power of 12.03% as compared to the previous voting power of 10.94%.

FY21 Financial Summary:

• Decent Growth in Revenue: For the year ended 30 June 2021, EML posted a growth of 60% in revenue to $194.2 million against FY20. The increase in revenue was backed by the growth of ~170.9% in revenue in the General Purpose Reloadable (GPR) segment.
• Rising Underlying EBITDA: EML recorded underlying EBITDA of $53.5 million, reflecting a growth of 65% on a YoY basis and the figures were at the top end of the guidance range of $50-$54 million. The rise in underlying EBITDA was supported by the growth of 42% in gross debit volume (GDV) to $19.7 billion in FY21. EML recorded a CAGR of 60% in underlying EBITDA during FY17-FY21.
• Growth in Bottom Line: Underlying NPATA for the year soared by 54% to $32.4 million against FY20, and underlying operating cash inflows stood at $46.7 million, which indicates 87% of underlying EBITDA.

Underlying EBITDA Trend (Source: Analysis by Kalkine Group)

Acquisition of Sentenial Limited: 

• As announced on 30 September 2021, the company completed the acquisition of Sentenial Limited and its wholly owned subsidiaries for an upfront enterprise value of €70 million (A$112.7 million) plus an earn-out component of up to €40 million (A$64.4 million).
• Benefiting from the acquisition, EML’s payment offerings would be enhanced and include alternate (non-card, non-scheme) digital payment products to its platform in order to address customer demand, complementing its card scheme-based payments.
• The company anticipates processing transactions in excess of A$90 billion annually after the said acquisition.

Key Risks:

• Regulatory Risk: The company’s Irish regulated subsidiary, PFS Card Services (Ireland) Limited (PCSIL), is currently in dialogue with the Central Bank of Ireland with respect to concerns in relation to PCSIL and potential directions. Hence, it seems that the company is under a regulatory risk, which could materially impact the European operations of the Prepaid Financial Services business.
• Forex Risk: The company’s business could be impacted by any adverse movement in foreign exchange as it operates in multiple geographies.

Outlook:

• The company expects to report revenue and underlying EBITDA in the range of $220-$255 million and $58-6$5 million, respectively, in FY22.
• In addition, EML anticipates gross debit volume in the ambit of $93-$100 billion in FY22.
• The company also expects a rise in the cost base because of new roles in Europe to address CBI matters, higher insurance costs, and internal & external audit fees.
• Looking forward, EML would continue to enhance volumes by identifying opportunities which offer significant payment volumes.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Backed by the growth of 19% in cash balance to $141.2 million as on 30 June 2021 against $118.3 million as on 30 June 2020, the company had a strong financial position at the end of FY21. The company is trading below its 52-week low-high average of $2.470 - $5.890, respectively. The stock of EML has been corrected by ~11.35% and ~27.20% in the past one and three months, respectively. The stock has been valued using the P/E multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight premium to its peers’ average P/E multiple, considering the expected growth in revenue and focus on growing GDV. For the purpose of valuation, peers such as Credit Corp Group Ltd (ASX: CCP), Pushpay Holdings Ltd (ASX: PPH), and Humm Group Ltd (ASX: HUM) have been considered. Considering the expected upside in valuation, growth in underlying EBITDA, increasing topline, rising GDV, strong financial position, decent outlook, current trading level, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $2.780, as on 10 November 2021, 12:00 PM (GMT+10), Sydney, Eastern Australia.

EML Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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