Market Price: $3.44

Market Cap: $855m

We last wrote about EML Payments Limited (EML) in the May edition of Leyland Lines. Considering their recently reported financial year results, we thought it timely to revisit the company’s impressive progress since then.

To recap, EML is a provider of payment solutions globally offering payment technology solutions for payouts, gifts, incentives and salary packaging businesses.

GIFT CARDS

EML commenced operations in 2012 as a provider of gift cards with Edge Loyalty generating under $3m revenue. Since then, the company has grown to be the largest gift card provider globally generating over $60m profit. The company operates in 32 countries and manages around 800 mall programs. 

In July, EML acquired Flex-e-Card, a European shopping mall gift card provider, with 226 shopping centres under contract. A cash payment of GBP 21.6m (A$ 40.5m) will settle on an attractive multiple of 10x EBITDA, given the strong EBITDA growth of 25% by Flex-e-card.

The regulatory framework in Europe around gift card management is assisting EML as card management is being taken away from the retailers and shopping centres and centralised with a dedicated provider. EML is well placed to participate in this potential market expansion.

Management also commented that they are entering in to shopping malls in the United Arab Emirates, highlighting Dubai as another significant business opportunity.

PAYOUT CARDS

EML offers flexible pre-paid disbursements and funding card programs for gaming payouts, government disbursements, healthcare reimbursements and commission payouts.

These cards are re-loadable and commonly used in sports betting.

In 2014, EML entered the online gaming industry, issuing reloadable pre-paid cards to Ladbrokes customers. Since then, the company has grown to be the leading provider of pre-paid gaming cards with operations in Australia, Europe and UK.

A significant tailwind which seems to be exciting the market at present is a mooted change in US legislation allowing for sports betting to be legalised on a state-by-state basis. EML are well place to service this market which would potentially be company defining given the significant scale of the US market. EML has a foothold in this market through the recently ASX listed Pointsbet. Further upside can be achieved through incremental partnerships as recently witnessed by the Bet365 agreement. We would envisage further partnerships with other online betting companies in the US as there is little proven competition for the payment services EML provide.

As US banks are regulated by the federal government and laws, they are restricted in processing payments, so non-banks such as EML are stepping in using various payment systems.

The following image highlights the opportunity available should more US states legislate to allow sports betting.

SALARY PACKAGING

In 2017, EML entered the salary packaging industry via an agreement with McMillan Shakespeare. Again, the company has grown to be the dominant player in this market with a market share of ~90% following the recent agreement with Smartgroup (SIQ).

EML has entered an 8-year agreement with SIQ to be the primary provider of reloadable cards for salary packaging purposes. The contract is anticipated to generate between $4m – $8m revenue.  

Further growth is expected as legislation came into effect in 2017 which capped bank fees on credit cards for salary packaging – resulting in the larger banks exiting this sector. EML offers debit cards with a flat monthly fee to salary packaging companies, thereby not falling foul of the updated legislation. The addressable market may increase further as numerous government agencies consider their existing arrangements and tax compliance.

FINANCIAL YEAR 2019 RESULTS

The company reported financial year EBITDA of $29.1 million, comfortably ahead of management’s previous guidance of $27-28 million.

Group revenue was up 37% to 97.2 million. All divisions delivered impressive revenue growth with ‘Gift & Incentive’ increasing 42% year on year to 66.4 million, General Purpose Reloadable (GPR) up 11% to 23.9 million and Virtual Account Numbers (VANS) up 166% to $6.4 million.

Pleasingly net cash held came in at $18.1 million, significantly better than the expected $10.4 million due to improved working capital.

Gross Debit Volume (GDV) represents the total volume of payments across EML platforms. Group GDV was up 34% to 9.03 billion.

The positive revenue outcome was achieved whilst maintaining diversification across clients, segments and geographies. 

OUTLOOK

The future looks bright for all three of the company’s divisions. Salary packaging revenues are expected to grow at least 30% next year. The malls opportunity in Europe and the Middle East is set to increase with little competition, the eMoney licence via the Flex-e-card acquisition (allowing self-issuance) and regulatory changes which potentially play into the hands of this division. The US Gaming opportunity is vast. Indeed the Managing Director, Tom Cregan, stressed the point in the results presentation that he wanted to ensure the other divisions were not dwarfed by US Gaming in the future in order to maintain a semblance of balance and not be overly reliant on one business. Whilst not cheap trading on FY 2020 P/E of 32X, this multiple is justified in our opinion when one considers the upcoming anticipated growth to come from the 3 existing business streams. Further upside exists from potential acquisitions which management have proven to be exceptionally adept at identifying and executing on.