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Paper gift vouchers are a thing of the past and this company is cashing in

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EML Payments is a structural growth company with multiple growth drivers and identifiable near-term positive share price catalysts - a clear standout at the most recent results season (40% FY19 EBITDA growth, solid earnings beat, market forecasts upgraded).

A positive outlook that is expected to be reaffirmed at the investor day scheduled for November 2019.

Indeed, FY20 consensus earnings estimates appear relatively conservative so we see scope for EML to issue better than expected earnings guidance.

Capped at just over $1 billion, EML is a fintech company specialising in issuing and distributing mobile, virtual and physical card solutions to corporate clients across Australia, Europe and North America.

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The company processed $9 billion of payments (defined as gross debit volume or GDV) in FY19 (grew 34% over the previous year) and manages more than 1400 programs across 23 countries.

EML's competitive advantage and point of differentiation versus the incumbent banks is its innovative approach to designing and implementing efficient payment solutions for customers across a number of industry sectors.

More than just a simple card issuer, EML leverages its highly scalable technology platform to provide a full end-to-end payments solution to clients, from initial implementation through to after sales support.

Contracts are typically five years in duration and client churn has been negligible with EML's platform deeply entrenched in customer ERP and payments systems, making it hard to displace.

Operating in a regulated industry, barriers to new entrants are also high.

Revenue is generated through various stages of a transaction life cycle, from set-up fees, transaction fees, interchange and breakage fees as well as interest earned on loaded funds.

The business model has a number of attractive characteristics, including being capital light and having high gross margins (77% heading to 80% plus) coupled with relatively fixed overheads, resulting in a high cut through of incremental volumes (highly scalable business).

The company has strategically targeted a number of very large and fast-growing industry verticals requiring innovative and customised payment solutions, such as salary packaging, shopping mall gift cards, gaming and wagering services and consumer lending.

EML is now the global leader in managing non-reloadable gift card programs for shopping mall clients, supporting more than 900 malls including more than 600 in Europe and more than 200 in North America.

Displacing inefficient traditional paper-based gift vouchers, typically issued and managed inhouse, EML sees strong growth prospects for this unit, particularly in Europe where a large German mall operator plans to roll out EML's program across more of its locations.

Taking advantage of the void left by the major domestic banks retreating from the sector, EML has established a dominant position in the Australian salary packaging reloadable cards segment (70% share).

The recent Smartgroup contract to transition the remainder of their portfolio will drive further growth over the next two years.

We view EML as a well-managed, high quality structural growth company with upside earnings risk and balance sheet optionality ($18 million of net cash as at June 30, 2019).

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Roger Montgomery is founder, chairman and chief investment officer of Montgomery Investment Management. Following a successful career as an analyst and public company chairman, Roger published the first edition of his stock market guide, Value.able, in 2010, becoming an Australian best seller in just 16 weeks. He holds a Bachelor of Commerce and is a senior fellow of the Financial Institute of Australasia.
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