This morning, the EML share price plunged 45% on open, when it announced that the Central Bank of Ireland “is minded to issue directions to PCSIL pursuant to section 45 of the Central Bank (Supervision and Enforcement) Act 2013.” Since then, the share price has rebounded to $3.36, or a drop of around 34%. Given that EML Payments is a payments business with operations in the US, Australia and Europe, investors are today struggling to quantify the damage this regulatory action may have, longer term. It’s certainly not obvious, so this article will methodically go through some of the factors to consider.
The relevant section of the act allows the central bank to impose specific directions on financial service companies like PFS, the EML Payments subsidiary that is being targeted by the bank. At the milder end of the scale, a direction may merely require that PFS rectify a failure to comply with “any condition or requirement imposed by, or by virtue of, financial services legislation.” At the more severe end of the spectrum, the direction may require that PFS cease “carrying on business in a manner specified in the direction or otherwise than in a manner so specified.” In the worst case scenario, the communication from the Central Bank of Ireland may inform PFS that “there may be grounds for revoking or not renewing the regulated financial service provider’s authorisation.”
As a result the range of outcomes for the EML share price is still considerable. In the best case scenario, there may be some elements of their PFS business that they will need to tweak, in order to continue running the business. In the worst case scenario, their PFS business is done and dusted, and this action will force regulators in Australia and the USA to take a close look at the company’s operations.
EML Payments Admits 27% of Revenue at Risk
Meanwhile, EML Payments has told the market that “During the period from 1 January 2021 to 31 March 2021, EML estimates that approximately 27% of EML’s global consolidated revenue (unaudited) derived from programs operating under PCSIL’s Irish authorisation.” Importantly, the company concedes that these revenues could be severely impacted by directions from the Central Bank of Ireland.
Has The Market Underestimated EML Payments Regulatory Risk?
Probably the worst aspect of this announcement is that it suggests that EML may have failed to take the necessary measures to comply with anti-money laundering laws. This would be a systemic issue with the company, rather than a one-off mistake.
Certainly, one would hope that the company is immediately looking at its regulatory risks throughout its entire operations. That will come with considerable expense, or else the company may well fall afoul of regulators in other jurisdictions. It doesn’t take a very intelligent or aggressive regulator to put the spotlight on a company that has already been struck by regulators elsewhere. In the best case scenario, this should translate to additional ongoing expense, and a reduction in any revenue that might be considered high risk revenue.
EML Payments Re-iterates Guidance “excluding costs and impacts”
In what can only be interpreted as an act of desperation, EML Payments has re-iterated guidance, excluding the costs and impacts of the potentially disastrous situation described above. Based on this full year guidance, excluding costs, the company expects to make “Underlying full year NPATA between $30 million – $33.5 million.”
At $3.36, EML Payments has a market capitalisation of around $1.2 billion. Even if we accept their “underlying” as describing the true earnings power of the business, and then even if we accept “NPATA” as a proxy for net profit after tax, and then even if we take the top end of guidance which excludes the regulatory strife, we would get a price to earnings ratio of 36.
If we were to take a less delusional view of profits, the P/E ratio would be much, much higher.
Poor Judgement On PFS Acquisition
One factor shareholders should consider is that it is now clear that EML Payments bought a lemon in PFS. At the time, many investors myself included were impressed that management were able to secure a reduced price for PFS, when markets were in turmoil last year.
However, given that the proximate cause of the current regulatory issues was Brexit, and the fact that this now brought PFS under the purview of the Central Bank of Ireland, perhaps it could be argued that EML failed to sufficiently understand the regulatory environment they were buying into.
Notably, this was not the first time PFS got into trouble with regulators.
French regulators fined Prepaid Financial Services €1m for anti-money laundering failings, following an on-site inspection— John Basquill (@JohnBasquill) October 1, 2019
PFS says issues were isolated to a small no of programmes and occurred in France only — now reviewing whether to appeal the fine:https://t.co/aJLeemR9i8 pic.twitter.com/3oKghczORS
One tweeter chimed in with a view that investors are likely considering in the harsh light of today’s news.
Imagine lobbing a bid in for a biz with a history of flouting regulation and then thinking you’re not the mark when they offer it to you for half price. $EML— Dave (@SmallCapEagle) May 19, 2021
What Now For EML Shareholders?
First of all, it is somewhat a matter of luck that I do not hold EML shares. You see, I sold my shares a little over a year ago at prices from around $4.68 to below $2.68, with an average price not far off where it is today. I never bought back in because I had better ideas.
Today, you’ve really got to wonder how EML Payments could realistically be someone’s best idea, or even their top 20 best ideas. The most obvious reason why this would be the case is that they take the view that the current regulatory strife will be fleeting and have no ongoing impact on either profits or market sentiment.
If, on the other hand, we said that this action will reduce the profit un rate to 10% below the low end of guidance, going forward, then the company would be on about 44x an arguably optimistic estimate of profits. This doesn’t seem particularly discounted for a company that has self-evidently not been able to manage its regulatory responsibilities to society. It certainly seems that the people are paying $1.2b for this company today are taking an optimistic view of the potential outcomes from this regulatory dialogue with the Central Bank of Ireland.
The author has no position in EML Payments. This post is not financial advice, and you should click here to read our detailed disclaimer.
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