EML Payments — Moving forward

EML reported FY21 GDV substantially in line with our forecast. A higher-than-expected yield of 99bp versus our 92bp forecast resulted in group revenue 5% ahead of our forecast. Gross profit grew at a slower rate than revenue, reflecting the higher proportion of lower-margin GPR business in the mix, with PFS included for a full 12 months in FY21 versus three months in FY20. On a reported basis, EBITDA grew 30% y-o-y to A$42.2m. This figure is after accounting for $11.4m in costs relating to the CBI issue (EML incurred costs of A$2.1m and provided for a further A$9.3m in remediation costs) . Adjusting for this, underlying EBITDA was A$53.5m (+65% y-o-y), at the upper end of the company’s guidance range (A$50–54m) and 7% ahead of our $50.1m forecast. NPATA of A$21.0m was flat y-o-y (we note that FY20 NPATA has been restated from A$24.0m to A$21.0m, described in more detail on page 4). Adjusting for the CBI costs, underlying NPATA of A$32.4m was ahead of our $31.2m forecast and at the upper end of company guidance (A$30.0–33.5m).

EML closed the year with a cash position of A$141.2m; offsetting this is the $3829m owing to PFS in deferred consideration (fair value of A$40m obligation) to arrive at a net cash position of A$103.0m. As we had previously expected the Sentenial acquisition to close on 30 June, our net cash forecast at the end of FY21 was after a A$60.3m cash payment for the acquisition; compared to our adjusted net cash forecast of A$105.4m, net cash was only marginally lower.

We discuss divisional performance in more detail on page 3.

G&I saw a 6% decline in GDV in FY21 due to repeated lockdowns around the world, particularly around Christmas time. Q420 had already experienced weakness in volumes due to COVID and H221 GDV was 6% higher y-o-y, showing that trading is starting to recover. Revenue was actually 3% higher y-o-y; the yield of 635bp resulted from higher breakage rates, particularly in the US where an additional A$11.1m was recognised, as there was an increased level of funds left on cards at expiry. The company noted that mall volumes made up 56% of GDV, with the remaining 44% from the incentives business, which grew 11% y-o-y. Due to the higher contribution of breakage compared to FY20, gross profit was 11% ahead of our forecast and flat y-o-y.

GDV growth of 130% y-o-y reflects the full year inclusion of PFS, versus three months in FY20. The company noted that PFS contributed GDV of A$6.4bn (+20% y-o-y on a like-for-like basis) and revenue of A$78.3m, and the original GPR business GDV of A$3.3bn (+13% y-o-y) and revenue of A$35.3m (+34% y-o-y). The transition of salary packaging accounts from Smartgroup and NSW Health is complete and EML now manages 320k accounts. Gaming payout programmes saw increased volume in all markets with revenue 87% higher y-o-y. Gross profit increased 163% y-o-y, while gross margin declined by 2pp to 58%. PFS has lower gross margins as it currently outsources payment processing. EML has developed an in-house payment processor, TRACE, and initially is adding new customers to the platform. Over time, existing PFS customers will be brought onto the TRACE platform resulting in lower processing costs for the division. EML was recently approved as a direct member of the Faster Payments Network (FPN) and has just gone live, reducing fees from 20p to 2p for those transactions using the FPN. Over the next three years, the combination of TRACE and FPN should drive GPR gross margins up by c 5%.

Management noted that the CBI issue has resulted in delays to programme launches in Europe, reducing establishment fees during Q421 by c A$1m.

We have previously written about the CBI investigation into PFS Card Services (Ireland) Limited (PCSIL), the entity through which PFS’s European (ex-UK) business has operated since 19 December 2020. The company provided an update confirming that it continues to work with the CBI and has provided a detailed remediation plan to address concerns raised. EML expects this plan to be substantially complete by the of CY21, with the remaining items to be addressed by the end of March 2022. EML noted that prior to the CBI letter, it had already been strengthening the risk and compliance functions of PCSIL, including expanding the board, implementing a fraud detection tool and adopting KYC and AML tools from third-party providers.

EML is currently restricted from materially growing PCSIL’s business and is discussing this with the CBI. Management expects that this restriction will be lifted once the remediation phase is complete. On the results call, management highlighted that the CBI requires PCSIL to be managed locally, with a strong board, and for risk and compliance to be staffed locally.

The VANS business saw a 4% increase in GDV y-o-y. With a slightly lower yield, revenue declined 4% y-o-y. However, due to the customer mix, gross profit increased 10% y-o-y, with the gross margin improving 9pp to 74%.

EML has restated FY20 accounts because of an issue arising in PFS relating to the recognition of breakage. The company recently discovered that prior to acquisition, PFS had been recognising breakage revenue more quickly than it should. This means that the completion balance sheet as originally recorded understated the liability to cardholders (ie cardholders who may yet use the balance on their cards) by A$28.2m and also understated the intangible asset ‘Customer contracts’ by A$15.9m. In July, EML injected A$28.2m of cash into segregated funds to cover this amount. Over the course of FY22–28, the company expects this cash to be released back to EML as the dormant funds and expired eMoney balances meet the conditions to be transferred to EML ownership.

EML also revisited the contingent consideration due to PFS (based on estimates of EBITDA achievable by PFS in FY21, FY22 and FY23) and revised the amounts due as at the end of FY20 and FY21. The company now estimates that PFS did not hit its EBITDA target in FY21 (we assume because of the costs incurred in dealing with the CBI issue) and has revised its expectations for FY22/23. In addition, certain costs incurred by EML are deemed to have arisen pre-acquisition so reduce the amount due to the PFS vendors (A$13.2m in FY21). Prior to the discovery of the CBI issue and breakage recognition issue, in H121, strong performance by PFS had led EML to revise up the amount of contingent consideration due by A$24.0m, resulting in a fair value loss reported as an exceptional item. This has now been revised down to A$16.6m for FY21. Overall, the contingent consideration recorded on acquisition has been revised down from A$76.2m to A$12.5m and at the end of FY21 stands at A$14.3m (compared to our previous forecast of A$97.4m).

EML signed 121 new contracts in FY21, of which 21 programmes were implemented. In total, 144 new programmes were implemented in the year: 95 in GPR, 46 in G&I and three in VANS. The company has had particular success with government and NGO programmes, including the ASPEN card for the UK Home Office and stimulus programmes for the Jersey government and the Northern Ireland government. Programme launches in other sectors include:

Since we last wrote, the deal has been approved by the FCA in the UK. The ACPR in France is currently reviewing the deal. The company hopes to receive approval in September, and if this is forthcoming, plans to complete the acquisition on 30 September. Since the acquisition was announced, Sentenial has won several new customers including Nuvei, Ecommpay, Hertz, Games Workshop (via Visa Cybersource) and Touchnet.

The company has issued guidance for FY22 (see Exhibit 3), which assumes that the Sentenial acquisition completes on 30 September and is consolidated from 1 October.

Our forecasts had assumed that the deal would be consolidated from 1 July, so we have revised our assumptions to reflect consolidation from 1 October. We have also updated our Sentenial forecasts to reflect the current euro/A$ exchange rate. This accounts for the majority of the changes to our forecasts.

After the initial shock when the CBI letter was received in May and the stock fell from A$5.15 to A$2.80, the share price has traded in the range A$3.30–3.90. Exhibit 5 shows how EML is trading in relation to three groups: global payment processors, pre-paid card companies and Australian fintechs. In FY22, we are forecasting Sentenial to make a small loss at the EBITDA level, depressing group EBITDA, so comparison to peers is less helpful. In FY23, we expect that Sentenial will generate positive EBITDA. In FY23, EML is trading at a discount to global payment processor peers on an EV/EBITDA basis and on a P/E basis, reflecting the scale and profitability of peers. EML trades at a premium to prepaid card peers on all metrics, reflecting its higher growth prospects. Prior to the CBI issue, EML’s valuation metrics for FY23 were an EV/EBITDA multiple of 21.4x and a P/E multiple of 37.5x. If the issue is successfully resolved without further costs being incurred over and above the A$9.3m already provided for, then we would expect the stock to re-rate upwards.