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EML Payments Lights Up Reloadable Cards

Australia | Feb 18 2021

This story features EML PAYMENTS LIMITED. For more info SHARE ANALYSIS: EML

EML Payments is showing promise, with the benefits of diversification becoming obvious in the first half

-PFS already proving its worth as an acquisition
-Substantial opportunities for reloadable cards in new verticals
-Upgrade potential as growth outlook becomes more assured


By Eva Brocklehurst

Payment solution provider EML Payments ((EML)) has delivered a much brighter outlook for gift and reloadable cards, given the past year has been dogged by uncertainties.

In the first half, general purpose reloadable (GPR) card revenue increased 313%, and remains core to the strong trajectory. Gift & Incentive (G&I) revenue of $35m was down -13%, affected by social distancing and weaker spending patterns.

Currency headwinds are significant, as around 90% of revenue is sourced outside of Australia, yet guidance for FY21 revenue of $180-190m and operating earnings of $50-54m is considered likely to be on the conservative side.

Canaccord Genuity points out EML has a history of tightening guidance to the top end throughout the second half. The company has probably passed the worst and there should be a strong uplift in earnings performance throughout FY22-23, with little in the way off incremental costs.

PFS (Prepaid Financial Services) is proving to be a great acquisition in Macquarie's view, having made a solid contribution in the nine months of ownership with a revenue of $38m. Synergies are not expected until FY23.

The G&I segment was materially affected by the pandemic and the temporary shutdown of shopping centres. Investors had been concerned that revenue would be severely weaker but in the end the company has proved resilient, particularly in light of the harsher lockdowns in Europe and the UK.

Assuming lockdowns are not extended, Macquarie suspects the top end of the guidance range for operating earnings is just a starting point, although tough conditions are likely to continue through to at least the third quarter.

The company has commenced the rolling out of new retail platforms for shopping centres in Europe, integrating both in-store and online selling of gift cards in anticipation of a recovery.

UBS believes the gift card environment can recover to around -20% below pre-pandemic levels by FY24, although there is plenty of upside risk to forecasts. The company can leverage the structural shift to digital payments and has a strong track record of growth.

The gift card business in shopping centres may retain some lingering uncertainty but it can also be a large driver of the upside post the pandemic. The half year featured the launch of Project Accelerator with the intention of integrating a number of the company's technologies along with its partners into one solution.

Canaccord Genuity notes the company is in a reinvestment phase with a $10-15m investment plan in technology over FY21-22. Organic growth has been complemented by accretive M&A and management will secure a debt facility in the second half to enhance liquidity.

Reasons To Be Bullish

EML is likely to be a beneficiary of the re-opening of shopping centre trade along with general consumer activity. The main risk Macquarie envisages is prolonged lockdowns and a failure to convert the sales pipeline. The broker maintains an Outperform rating with a $5.70 target.

UBS, which also has a $5.70 target and a Buy rating, considers the re-rating of the stock on the back of the first half results is likely to be the start of a growth story and there is further upgrade potential as the market becomes more comfortable with the multi-year growth story.

There were 79 new contracts gained in the first half and 64 new programs launched. UBS estimates the global prepaid card market was around $1.1tn in 2020 and growing at double digits.

Moreover, there is substantial opportunities for penetration in the GPR segment with application to new vertical markets. Wilsons remains constructive on the stock and considers FY21 will be a year in which the PFS acquisition will prove its value proposition.

Wilsons calculates GPR to be 53% of FY21 gross profit, with the shift to this segment resulting in a more resilient and less "lumpy" business. Meanwhile, the outlook for G&I is improving as vaccines become more readily available.

Earnings margin expansion remains plausible, in the broker's view, with more than $6m in synergies available and a strong balance sheet. Incremental traction at Project Accelerator is also a highlight and Wilsons retains an Overweight rating with a $5.41 target.

Estimates for operating earnings are ratcheted down in FY21 to allow for operating expenditure and increased investment and the broker assesses FY22 is likely to be the more "normal" year.

Canaccord oints out payments companies typically trade on large valuation multiples because of the recurring and higher margin revenue streams. A highly regulated industry also provides barriers to entry. Amid increasing medium-long-term earnings growth forecasts the broker raises its target to $5.50, maintaining a Buy rating.

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