EML reported a result that was in line with expectations, however there is quite a bit to unpack given the impacts of COVID-19 and the PFS acquisition on the result.

COVID-19 significantly affected the Gift and Incentive business of EML, with stay-at-home orders around the world dramatically reducing foot traffic in shopping malls. While it is obviously very difficult to forecast the near-term outlook for this segment, and it is for this reason that EML is not providing guidance, there is no doubt in our minds that it will recover. The world is opening back up and at the end of the day there will always be people who will demand gift cards either for their ease of use or more often because they have no idea what present to buy. Similarly, corporates will continue to use gift cards in their incentive programs etc.

The other critical thing to remember is that prior to the PFS acquisition the Gift and Incentive business accounted for greater than 75% of EML earnings, but post-PFS this has fallen to less than 40% and is therefore much less influential.

There were also significant mix shifts due to COVID-19 and the inclusion of PFS into the result for the first time. This resulted in large swings in various operating metrics that the market follows. Our analysis indicates that at a product level there were immaterial changes to key operating ratios. Given that the PFS acquisition was only in the 2020 result for 3 months, the Group level operating ratios will continue to rebase in the current financial year.

Taking a step back from the minutiae of the result, the one thing that stands out to us is the huge amount of growth optionality in the EML business. This comes from a range of factors:

1. Balance Sheet Optionality - EML has a very strong balance sheet with a cash balance of greater than $120m, strong cashflow conversion and zero debt. It obviously has plenty of liquidity and significant firepower to make acquisitions and invest in the business. Acquisition-based growth has been a significant driver of EML long term growth, and given the balance sheet this will continue.
2. Organic Growth – One thing that the market underestimates in EML is the strong organic growth profile of the business. As a provider of financial services, its organic growth is in large part driven by the growth of the corporates it provides its services to. An examination of the EML client list shows a range of high growth businesses. Digital payments is clearly a high growth market and the demand for these services has been turbo-charged due to COVID-19. EML provides strong leverage to this dynamic.
3. New Business Growth – EML has also unveiled its Project Accelerator strategy that has a number of aspects to promote new business growth. One item that stood out to us was the move to a global application layer and one integration touchpoint. Historically, the lead time for EML to bring on a new client, launch the program and begin to make money has been painfully long. This program should speed this process up significantly. 
   

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