How EML Payments is overcoming catastrophe

It's hard to imagine a more challenging experience for EML Payments than going through the COVID lockdown, says Shane Fitzgerald of Monash Investors Limited, but the business has come out mostly unscathed. He believes that while many expected a catastrophe for EML Payments, the diverse profit mix, outperformance of their newest acquisition and surprising resilience of the mall and incentives business kept the company afloat.

Today EML Payments delivered their half-yearly results directly in line with analyst expectations. For this normally ordinary result, the company was rewarded with a one-day price gain of 17%. Off the back of this, I sat down with Shane Fitzgerald to discuss these results, why he has held the company since 2015 and why this year might be a turning point for the company. The Q&A below is an extract of our discussion.

How long have you held EML Payments?

We were the first institutional shareholder in EML. So we've held it since the fund's inception around 2015. Over the years our holding in EML has shifted but it has always been part of the portfolio.

What attracted you to the company?

The company has a high growth rate due to three factors:

• Acquisition growth,
• Strong pipeline of new customers
• New customers themselves experiencing rapid growth

It can be easy to get lost in the weeds with this company because there are so many aspects to it. What we've always liked about EML is that at the very heart of it there is a financial services product which provides the ability for its clients to gain access to the rails of Mastercard and Visa to provide transactions. 

What EML can do over and above that is that they can customise that experience to deal with the requirements of a customer. For example in the mall business, they can issue a card which otherwise works like any other card but it only works in that mall. The use case for this ability to customise the card experience is limitless.

What were the key points of this result?

1. This result was in line with or better than what the market was expecting and EML's guidance was right in the middle of analyst expectations. 
2. We saw the strength of the PFS business proved which did underpin the positive result. 
3. The mall and incentive business held up very well despite the impact of mall closures globally. 

It's hard to imagine a more challenging experience than going through this Covid lockdown period which likely explains the 6% short interest in the business but overall these streams were only down some 10%.

Thank heaven for PFS: The graph above shows how EML's newly acquired PFS business (titled GPR) picked up the earnings slack left by the gifts and incentive (G&I) business. Prior to the acquisition of PFS, the G&I business accounted for 70-80% of the group's revenue. This diversified revenue mix allowed EML to retain their high-growth rates despite widespread mall closures globally (Source: EML Payments 2021 results).

Were these results within your expectations?

We have a slightly higher expectation of revenue than their guidance range. This company learnt 3 to 4 years ago that it is best to underpromise and overdeliver. We expected EML to be conservative with their guidance their forecast is right in line with analyst expectations.

Were there any surprises in the results?

The bear case - if I was to find one - might be that there was an increase in the breakage ratio for EML, which was a surprise. This is the calculation of money left over on cards which fail to be used by customers. The explanation given was that due to individuals being restricted in their movement the full amounts of their cards couldn't be used. 

But overall we saw the PFS business really take over and the mall and incentive side hold up quite well. The diversification of the business is now clear. 

Has your position on the stock changed post result?

When Covid-19 first hit we did dramatically reduce our weighting of EML, noting its exposure to malls closing, but around April we went back in. From there we began to add back to that position up to 6-7% of the portfolio and have taken some profits over 2020.

For now, we're quite happy with our current holding. 

EML's share price is up around 17% today, what is the market so excited about?

I think people are excited that there wasn't a disastrous financial result. I also suspect that there was an element of short coverage here, the level of short interest at 6% is a record high for the business. 

If the mall business wasn't going to have a catastrophe in this macro-environment, I can't imagine what would. To me, this looks like a relief-rally, I don't think we'll see analyst upgrades across the board but they are on track to meet their guidance quite comfortably.

CEO Tom Cregan noted that today's results prove a key shift for EML away from being just a gift card company. Is this a turning point for EML payments?

I think it could well be. Prior to PFS, approximately 70-80% of the company's earnings came from the malls and incentive card business. This result shows a fundamental shift of the profit mix away from malls into general payment solutions.

I don't think there is anything wrong with the malls and incentive business but others have struggled to fully appreciate the operation of that business. Now, the business brought through PFS is recurring and more of an annuity-style cash flow which diversifies their profit mix.

Management discussed the possibility of M&A given the high level of cash available. Do you foresee EML taking on any M&A opportunities in the near future?

We don't attempt to forecast future M&A opportunities because the possibilities are so large, but the company has a great track record with these deals in the past. Over the previous acquisitions, it often is the case that the deals prove to be good value in hindsight. 

How would you wrap up today's results in one sentence?

Despite the most challenging macro-environment that EML could face, EML has come out the other side mostly unscathed with a strong balance sheet and a very strong pipeline of new opportunities. 

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