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EML Payments Ups The Ante In The US

Small Caps | Mar 06 2019

EML Payments sustained substantial earnings momentum in the first half and is now ramping up its sports betting payment systems in the US.

-Evidence in first half of the company's ability to win contracts
-Legalisation of sports wagering in US opens up opportunity
-Capital management may be an option in 2019


By Eva Brocklehurst

Stored value card and supplier payments business, EML Payments ((EML)), has turned up its focus on sports betting, as the US market has deregulated, and brokers welcome the potential upside. Wilsons understands the company is looking at a number of M&A opportunities which should build out its customer base.

The broker believes organic growth, in tandem with the fast execution of its payment technology in US sports betting, could drive a re-rating. Revenue growth was 39% in the first half on a like-for-like basis with gross debt value (GDV) up 16%.

The company has raised FY19 revenue guidance to $88-94m and narrowed operating earnings (EBITDA) guidance to $27-28m. Wilsons expects the business will hit the top end of updated guidance, with the potential for additional upside. Operating cash flow was ahead of expectations and, while costs were also ahead, the business still managed to improve margins.

The broker suspects cost synergies are likely to increase in future with the PerfectCard DAC acquisition. Management expects gross profit margins to revert to around 80% by FY21, having posted a 66% margin in the first half because of amortisation of incentive payments to secure previous contracts. Wilsons expects continued strength in the company's earnings with a strong performance across all vertical markets and reiterates a Buy rating with a $2.20 target.

Bailieu suggests the first half result underscores the company's capacity to win contracts and provide organic growth. The company has turned the marketing focus in the US to the reloadable wagering industry after the legalisation of sports betting.

EML Payments is considered to be strong in this regard, given its Australian experience and recent deal with PointsBet in the US. Bailieu has a Buy rating and $2.40 price target on the stock. The broker considers GVC and Caesars are, potentially, sizeable contracts that should support growth beyond FY20. There are further M&A opportunities as well as new products and partnerships.

Canaccord Genuity flags management's reference to capital management initiatives in 2019, suspected to be in the form of a buyback and in the absence of a large-scale acquisition. The company has also grown its domestic salary packaging product as well as Australian/European gaming partners and improved the revenue conversion of LuLaRoe.

In the non-reloadable gift and incentive card business revenue increased by an impressive 49% to $32.4m in the first half. Canaccord Genuity notes this was driven by GDV and the successful launch of various small contracts in Europe and Australia as well as the contribution of Pre-Send/PerfectCard.

The company had business/revenue model that includes 1200 customer programs across 21 countries and nine currencies. Canaccord Genuity notes a high degree of operating leverage and believes the stock is trading on undemanding multiples. The broker retains a Buy rating and $2.25 target.

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