The gift that keeps on giving

Shane Fitzgerald

Monash Investors

In the last two weeks, EML has made two significant announcements - the acquisition of Flex-e-Card, and a multiyear contract with Smartgroup. Each of these announcements is significant in its own right. Collectively they add $9m to EBITDA over time, which is material given management’s guidance of $27-28m for this year, FY19. 

While EML is yet to provide guidance for FY20, prior to these announcements EBITDA in the range of $34m would have been about right, given the number of programs still maturing in EML’s portfolio, the strong organic growth in these programs, and of course, the significant fixed cost leverage in the business. Following these announcements, FY20 EBITDA in the range of $40m is expected, representing over 40% growth in EBITDA from the previous year.

The acquisition of Flex-e-Card solidifies EML’s market dominance in the shopping mall gift card market in Europe. 

Post this acquisition, EML will provide shopping mall gift card programs in over 800 malls globally. This acquisition adds $4m initially in EBITDA and is being cash funded. This will grow once EML becomes the issuer of the card programs, in addition to strong organic growth in this market. In Europe, there are still significant numbers of malls that use paper based gift programs. There is also an increasing trend for corporates offering staff rewards in the form of mall gift cards. This industry vertical dominates EML’s earnings, and while it doesn’t get the same attention as EML’s other opportunities, the earnings potential remains underappreciated by the market.

The eight year contract with Smartgroup to provide branded General Purpose Reloadable card programs for the payout of Salary Packaging benefits, sees EML now dominate the Salary Packaging market in Australia. Management has indicated that once the program is operational it will add around $6m at the midpoint of guidance in revenues. With a gross margin of 85% and minimal additional costs, the EBITDA from this contract will likely be around $5m.

The strength of EML’s business offering is its ability to tailor its products to meet the needs of its customers. It is more than a payment processing company. It is for this reason that once EML gains a foothold in an industry, by solving an inherent problem / service enhancement, it tends to move on to dominate that industry. Examples of this included card based gift cards in Australia and now Europe, sport betting in Australia, and the Salary Packaging industry in Australia.

Right now, it has a major foothold in the sports betting markets in UK/Europe and has made a strong start in the emerging sport betting market in the USA. Given EML’s impressive track record of becoming a must have partner once they demonstrate their product offers to an industry, and given the scale of these industries, this should see EML continue to achieve impressive earnings growth. EML also generates significant free cash flow, and we would expect the commencement of dividend payments.

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Shane Fitzgerald
Fund Manager
Monash Investors

Combining over 25 years’ experience to offer compelling early stage insights on pre-ipo and microcap companies mispriced and misunderstood by the market. We maintain a long/short absolute return focus, with strict stock selection criteria.

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