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EML Payments

Gimlet eyed readers of Kimber Capital’s blog will recall our previous investment thesis on payments company EML. The proposition paid off significantly this week when EML’s share price touched a high of $2.38 – a 58% return on our first $1.50 buy call some 9 months ago.

The market has not however, been without its conniptions. After a north coast surfing holiday, my Zen was shattered by Federal election polls (not by a Sunday 10% Byron bay surcharge on takeaway coffee) and I bailed last week, reducing some equity risk exposure, on positions like EML.

To be greeted on Monday by a new liberal government, and not Black out Bill’s mob, and a sharply higher EML price ahead of announcement on Tuesday the company had bought is major European competitor in shopping mall gift cards. What to do? Only response was to buy back in to the rising EML price.

The lesson being if the investment thesis stacks up, ignore the surrounding market noise.

Because again EML management have demonstrated their ability in spades in buying a bolt on earnings accretive acquisition. Flex E card is 14% EBITDA accretive to EML’s earnings for FY 20 and FY 21. That’s about $4million for this and next year.

EMLs EBIT for this financial year is forecast around $27 million but next year that’s expected to hike to around $35 million or about nine cents a share in earnings.

The projected EML PE multiple is still low at 26 times for a growth story – compared with Woolworths which is a low digit growth story priced to perfection on 25 time earnings. Where would you rather invest? The market arguably should be valuing EML on around a 30—35 times earnings multiple because of 75% plus gross profit margin. Our new target price is $2.70 -$3.00 a share.

Flex E card join’s EML’s global growth stable operating across 226 shopping malls US Europe and the UAE. And expands EMLs business into new regions. Importantly, Flex E card has a resilient revenue stream, with an almost non-existent customer churn. Which basically means there is a high level of repeat business which alleviates price pressure and volume discounts which are normally associated with shopping mall gift card businesses. Flex E Clear brings with a significant presence in Poland and United Arab Emirates (UAE). It also brings EML’s suite to 800 shopping mall gift card programs globally.

EML is funding the acquisition with $25.6 million of cash and a $15 million banking debt facility. EML has to date had no debt on the balance sheet. And given the short-term tenure (FY20) of this facility, and the high recurring / high margin of EML’s business, its likely EML will able to expand the facility. Post acquisition EML will have approx. $25 million in cash.

Though it remains to be seen whether the company will pay a maiden dividend to shareholders this year. As management demonstrate they are better at deploying capital delivering consistent double-digit earnings growth. One of the attractions of Flex E card is its investment in kiosk technology. This gives multiple sale points of gift cards within one mall.

As the Flex E card acquisition has shown management are opportunistic in making acquisitions.

EML, as we have said previously, looks cheap against larger mature payments behemoths like Visa and MasterCard. Visa trades on forward P/E of 25x times for 2020 earnings, while MasterCard is 35x times current earnings. And neither are forecasting growth anything like EML’s.

Another potential 800-pound gorilla lurking in the background is the US sports betting market. EML has signed a multi-year deal with Bet 365 to provide it with reloadable cards for the state of New Jersey. The sports betting market is estimated at US$150 billion a year. And the US Supreme Court has mandated each state can introduce its own legislation to legalize sports betting. EML’s agreement with Bet 365 provides for a rollout across other states. The market is unlikely to see material earnings until the second half of next year. But everyone is watching with keen interest.

So, pessimists buy bonds, optimists buy equities. TINA (There is no other alternative) depends on how full or empty your glass is. And picking the right growth story is the key.

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