Irish Uncertainty Continues For EML Payments

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Further correspondence from the Central Bank of Ireland has now indicated curbs may be placed on the growth aspirations of EML Payments' subsidiary, PFS Card Services

-Main negative is potential limits on PFS Card Services growth
-Importantly, the CBI correspondence canvasses just proposed considerations
-Timing of remediation and resolution pushed out
 

By Eva Brocklehurst

PFS Card Services (Ireland) remains a thorn in the side of parent, EML Payments ((EML)), as the Irish regulator, Central Bank of Ireland (CBI), continues to run the ruler over its transactions. Further correspondence has signalled that, while acknowledging the company's efforts regarding remediation and governance improvements, the proposed growth policy is higher than CBI would like.

Hence, CBI has proposed certain limits be applied that, if implemented, could negatively affect growth. PFS Card Services will make submissions by October 28 and EML Payments will also present an analysis of limits applied across almost 27,000 programs.

Wilsons finds some positive news in that the nature of the potential directions is more limited than those originally foreshadowed in May 2021, and the range of actions the CBI will take sounds narrower than the company had originally feared.

Yet, without any financial savings details, the broker finds understanding the impact is difficult. Moreover, importantly, the CBI correspondence comprises of just proposals.

Wilsons is reminded that, at the time of acquisition of the PFS Card Services business, Europe represented 88% of revenue and the three largest markets were France, UK and Spain. While the broker finds it difficult to determine the quantitative nature of the impact, the focus appears to be about curbing growth.

This is the main area of risk, UBS agrees, i.e. the ability to take on new customers. If the CBI sets limits that are too close to expected growth from existing customers, this would affect establishment fees for new clients, which are higher margin.

If the resolution of the issue draws out further into 2022, the broker estimates around -$4.5m of incremental compliance costs would mean a -12% impact on net profit.

Still, in noting that the EML Payments share price is -28% below what it was when the CBI investigation was announced, the broker points out this represents a more substantial loss compared with the upfront cost of the entire PFS Card Services business.

Timing/Uncertainties

There is a wide range of potential impacts on the European earnings from any final directions from the CBI. Irrespective of the actual details, the timeframe for any resolution has been pushed out by months and Ord Minnett raises the equity discount rate of EML Payments to account for increased risk around future earnings.

A timeframe over which the restrictions could be in place is missing from the CBI correspondence, Wilsons notes, as well as the number of programs affected. Another issue centres on applying the rules in a practical way. While curbing growth might be the ultimate goal, ensuring a business does not grow organically could be extremely difficult.

Macquarie was hoping for a faster resolution but also points out the probability of a more severe outcome such as a loss of license is now reduced to zero. Forecast earnings, therefore, have been re-based and the broker expects it will be almost "business as usual" by the first half results.

Canaccord Genuity expects the remediation plan will be completed over the next six months and the company will ultimately be able to grow existing and new programs in line with prior revenue growth targets.

Nevertheless, this is likely to come with a reduced earnings trajectory given the higher compliance expenditure. PFS Card Services is likely to experience a reduced consideration following a pricing restructure and revisions to earn-out.

Transaction History

EML Payments made the acquisition of PFS Card Services in November 2019, finalised in March 2020, for $423m plus an earn-out. Based in Ireland, the digital gift card and pre-paid card business was expected to open up banking as a service in Europe to EML Payments.

Yet in early 2021 regulators had swooped, raising concerns about money laundering and terrorism financing within the PFS business, as well as governance issues. EML Payments has asserted the problems pre-dated its acquisition and, subject to audit, should have no impact on earnings.

Canaccord Genuity, not one of the seven stockbrokers monitored daily on the FNArena database, awaits more clarity on the outlook and the impact of the CBI rulings before adjusting forecasts and retains a Hold rating with a $3.50 target.

Wilsons, also not one of the seven, has an Overweight rating and $4.71 target and has placed its earnings forecasts under review. RBC Capital, equally not monitored daily, has made the decision to downgrade its rating to Sector Perform from Outperform with a new target price of $3.90, down from $4.20 prior.

Ord Minnett maintains there is significant upside to the stock in the medium term once issues are resolved. There are three Buy ratings on FNArena's database with a consensus target of $4.46 that suggests 38.8% upside to the last share price.

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