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EML – relative value

The fish Tom hooked has been resized. And the charm of a deal, like fishing, is that it is the pursuit of what is elusive, but attainable, a perpetual series of occasions of hope. Which is exactly what EML’s CEO Tom Cregan discovered with Covid 19 and his hooked fish, PFS.  

EML announced the $423 million PFS deal, raising just shy of $100 million in new capital at $3.55, to help fund the transaction. PFS (Irish based Prepaid Financial Services) gave EML, now one of the largest FinTech enablers in open banking and prepaid globally, a significant European digital platform with over 200 customers. 

Covid 19 market conniptions saw EML’s share price crater from north of $4.50 to last week’s low of just above $1.30. And that led to some serious across the table bargaining about the consideration EML was paying for PFS. Because in the brave new world the various country lockdowns impact PFS earnings. Growth stock multiples also plunged to single digit figures. 

It can be argued the new resized fish Tom has landed is better. PFS purchase price is reduced 33% and EML has the near perfect deal outcome. Balance sheet strength, medium-term earnings growth. At a significantly lower cost.

PFS will now be acquired for $252m in upfront consideration, with $159m in cash payable from EML’s existing ~$270m in reserves. The remaining balance is set to be paid in additional scrip ($10m) and a deferred compensation component ($40m).  The PFS vendors will now hold under escrow about 8% of EML’s capital. And that means much of the acquisition risk is passed back to the PFS vendors. EML comes out of this with $100 million in cash.

Looking through the Covid 19 miasma EML has still had to pony up for PFS. The new acquisition price suggests PFS has been acquired at just under 15x FY 20 EBITDA multiple. And that multiple should fall to around 8x times in the next couple of years as earnings normalize.  Prior to the escalation of COVID-19, EML was well-on track to achieving the top-end of its FY20 guidance, with salary packaging, seasonal sporting event launches, and the new Simon Malls program set to spirit them across the finish line.

PFS also reported robust results for the first two-months of the calendar year, with GDV coming in at an annual run-rate of $6.2bn, well ahead of expected pro-forma forecasts of $5.3bn. But the COVID 19 health and safety measures containment measures such as social distancing and national lockdowns have limited a) cross-border travel, b) retail foot traffic, and c) sporting and venue closures, curtailed revenue growth.

Pain is now felt in EML’s Gift and Incentive segment, and PFS’ key customer programs in France and Spain. Helping to steady the ship is EML’s salary packaging and PFS’ welfare and government programs.   

The expectation this financial year was EML’s EBITDA would come in just under $50 million. And with a full year contribution next year from PFS, EBITDA was expected to climb to close to $80 million. Those figures are revised down now to around $35 million for FY 20 and $60 million – declines averaging about 25 %. These are conservative estimates and it is possible EML may beat them.

We still see significant upside in EML, and remain attracted to its medium-term revenue drivers, diversification of revenues, global footprint, and the relative safety of cash on its balance sheet.  

That is not to say there couldn’t be more global COVID market dislocation. With the current share price trading around $2.30, EML share price targets range between $3.00 and $3.90 a share depending on the scenario outlook. Based on forecast earnings EML is trading on a PE of around 22 which drops to around 18x times next financial year. Covid 19 will not last forever remember. And as EML builds earnings the market will be prepared to pay higher multiples. I see the current price as relative value, and instructions from my giddy aunt are to buy with my ears pinned back if the price drops to $2.00 or below.

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