A speculative buy: Mickey Mordech on EML Payments
This speculative buy has proved itself a skilful niche player around the globe
In many industries, traditional payment methods involve lots of friction; they are slow, rely on trust or have some other hitch. EML Payments exists to make it easier to pay digitally in a variety of situations, providing prepaid debit cards and virtual accounts for an array of applications.
The strategy is to go after niches, known as “verticals”, appropriate to its prepaid payment solutions. The mix of fees across verticals varies, but the company earns money charging establishment fees, “breakage” fees where it collects unused balances on cards, interest accrued on deposits, transaction fees and interchange fees charged to merchants.
The company’s main money earner is gift and incentive cards, where it supports more than 800 malls run by companies like Unibail-Rodamco-Westfield and German operator ECE. But EML has also branched out into niches such as salary packaging and sports betting, winning deals with bet365, GVC (which controls Ladbrokes, bwin and Coral) and several others.
EML is now dominant in Australia and is rolling out its technology with partners in Europe, the UK and the US, where online sports betting is gradually being legalised state by state. This summarises our first key pillar of the investment case: EML has shown that the company’s solutions are applicable to many different verticals in different countries, giving potential investors many ways to win.
EML was born out of the purchase of emerchants in 2011 for $12 million. Tom Cregan arrived as chief executive and managing director in 2012. Back then, emerchants earned just $1 million in revenue – 90% of which came from one customer – and the company had just blown through $6.5 million in cash over the fiscal year.
With just a few months of cash in the bank, Cregan began the turnaround.
The company now operates in 21 countries, has more than 1200 card programs and the stock has risen forty-fold since 2012. With 6.6% of the company, he’s well incentivised to continue building this business.
Nevertheless, Cregan has been quick to downplay expectations of a rapid recovery in EML’s gift card division, suggesting it will be two to three years before shopping centres return to normal.
The company also benefits from a capitallight business model. Winning a contract and developing an appropriate solution are the only prerequisites to growth – no large financial investments are required. For the recent Smartgroup contract, for example, the company added just two staff to deal with the added workload. If capital is deployed, it’s likely to be on an acquisition.
Relatively fixed costs mean EML has lots of operating leverage. If revenues grow, free cash flow should grow even faster. The company boasts a gross margin of around 75%, so almost half of any incremental revenue should come out as cash. We wouldn’t be surprised to see it start paying dividends in the coming years.
Revenue growth in future years is underpinned by a number of contract wins that are yet to contribute to group earnings, the rollout of its gaming solution in the UK and the US, increasing adoption of gift cards globally, organic growth of its customers and a pipeline of deals.
EML has a $100 million cash pile – not including $25 million of breakage to be received in due course – which will leave it well placed to buy other businesses if opportunities arise. Recent acquisition Prepaid Financial Services will also be well incentivised to hit growth targets to trigger its earn-out payments.
The combined business will boast card programsasdiverseassportsbetting,government disbursements and digital banking. We’re confident it will find new niches to enter in due course, thereby increasing its sliver of global payments over time.
Growth will stall temporarily, but the recent 80% fall in its share price to $1.33 was irrational. Mr Market has since regained his senses, with the share price almost tripling from the lows of late March, bringing it back above our original upgrade price. Speculative buy up to $3.50.