The best things sometimes in the market are unexpected. Tom Cregan, EML’s CEO Bazinga moment was Monday, two days ahead of the company’s AGM, when a $423 million acquisition was announced for the Irish group Prepaid Financial Services (PFS).
The deal, about half the size of EML’s current market capitalisation, is strategic and company transformational. It is awesome, to use the genre of the day. PFS will cement EML’s growth in global payments over the next 5 years.
Although a Bazinga deal, EML is paying 17.5 times EBITDA, for PFS using a mixture of debt, equity and cash. Post-acquisition cost synergies bring the acquisition cost down to 14 xs. The very nature of the PFS meant it was never going to be sold cheaply. Its vendors have $77 million of EML stock as skin in the game as well as earn out targets.
Over the next couple of years PFS has the capacity to double EML’s revenue from around $120 million to well over $200 million. Compound annual growth is expected, for the merged business, to crank along at just over 30%. And, for that type of growth the market is prepared to pay high multiples – as much as 20-25 times EBITDA.
The $65 million institutional funding capital raise closed 10 times oversubscribed on Tuesday, and EML nearly touched $4.50 when trading resumed on Wednesday – up more than 60 cents from its pre suspension close. EML shareholders will receive in the next week, their one for five non-renounceable notices for new shares at $3.55 each – as part of the PFS financing package.
Take them up. And if you don’t own the stock buy it. With such a high growth rate and the imminent opportunity of EML being elevated to the ASX Top 200 ( index funds need to buy the stock) EML has moved up the global rankings as a leading Fin Tech enabler in the open baking and and prepaid processing card payments. And an 18 month share target of $6 doesn’t sound unreasonable. For context the PFS buy out helps EML more than double its Net Profit before Tax (NPBT) from $30 million to over $60 million by 2022. EML will have gross debit receivables of more than $18 billion – more than twice that of After Pay and on a fraction of the valuation multiple.
The diversification of customer verticals and the geographic mix and now as a European leader in banking as a service makes EML like an Afterpay, except for money.
The company message to shareholders is don’t expect dividends. And shareholders shouldn’t. Because at 30% annual growth cash will be ploughed back into growing the EML business. And it will be some time before business maturity spins out more cash than is required. It is difficult in the market to find companies with a management track record like EML’s in growing earnings at consistently high rates. And the market has faith in the ability of management to execute on the implementation and integration of PFS into the EML business.
The next big growth phase is the $17.5 billion American sports betting market. EML provides the back end and payments system for sports betting company’s like Sports Bet. The simple reason is most credit and debit cards will 75% of the time rejected transactions clearly defined as gambling payments. EML’s reloadable cards circumvent this major banking problem for sports betting companies in the 51 different nations masquerading in fancy dress as the American nation.
I have attached the link to EML’s PFS presentation. Read it. An investment in knowledge always pays the best interest. This will be many times over in EML’s case.