The EML Payments share price soared over 30% on the day the gift card and rechargeable card company released the EML Payments 2023 full year results. In FY 2023, EML Payments (ASX: EML) revenue grew 9% to $254.2 million and came in ahead of guidance. The underlying EBITDA (sorry Charlie) dropped 28% to $37.1 million but on the bright side, that was also ahead of guidance.
Underlying EBITDA benefits from the removal of non-cash items which in EML’s case include impairments of greater than revenue generated. It also can remove supposedly ‘non-recurring’ fraud costs and fees regarding the ongoing mediation with the Irish Central Bank (ICB), but we’ll get to that.
Because these fraud costs are not an ongoing expense (at least, one would hope not) it is worth considering the business without those costs. But at the same time we do not subscribe to the view of many EML shareholders that one should disregard these expenses completely. Once you account for the significant impairments, EML produced a net loss of $284 million for FY23.
Gross debit volumes increased 62% on the prior year to $129.6 billion, with impressive growth in digital payments. Despite the growth in revenue, EML still had operating cash outflows of $2.6 million, though that was an improvement on the $41.5 million outflow in 2022. The company finished with $71.4 million cash in the bank.
As mentioned before, the results came in ahead of guidance, but the result was also well ahead of consensus estimates. According to S&P Capital IQ, the consensus estimate for underlying EBITDA was about $28m, with the highest individual estimate being $32.2 million. Therefore, the actual result was a 15.5% beat of the highest analyst estimate in the group surveyed by S&P Capital IQ.
Rising interest rates over the last 12 months led to significant growth in interest income. This was the provider of top line growth as revenue from contracts with customers actually declined by 3%.
The global gift cards and incentives segment grew gross debit volume by 24% and revenue up by 9% to $74.6 million, due to increased demand for mall shopping post-lockdowns.
The Digital Payments segment generated revenues of $21.7 million up 23% on the PCP, boosted by a full year of the Sentenial acquisition.
Given the regulatory issues in European Digital Payments, EML is now more focused on its Gift and Incentive and Australasian General Purpose Reloadable businesses which continues to perform.
EML Payments May Sell Its Loss-Making Entities
Regarding group structure, interim CEO Kevin Murphy outlined the plan to split its European problems out from the main business and have the UK business, Prepaid Financial Services Limited (PFSL), separated from the Irish business, PFS Card Services (Ireland) Limited (PCSIL), by the end of the first half of 2024.
Since then, EML announced that “after close of trading on Monday 11 September 2023, the directors of its Irish subsidiary PFS Card Services Ireland Limited (PCSIL) indicated their intention to resign their directorships.”
At the time of the annual report, Murphy commented:
“As part of the strategic review, the Board has also determined to separate the U.K. and Europe, General Purpose Reloadable business. The U.K. business, PFSL, will be a stand-alone business from the Irish domiciled European business.
The separation of PFSL from PCSIL under EML’s GPR segment has well progressed and is expected to be completed by January ’24. PFSL and PCSIL are inherently different businesses in different geographies. There are no scale benefits being derived from this grouping. So it makes sense for them to operate on a stand-alone basis given their fundamentally different client and risk profiles and remediation status.”
There was also commentary on the call regarding potential acquirers of EML and its segments as the company looks to streamline the business. No doubt stoking shareholder excitement:
“To date, EML has received a number of approaches. We are working with Barrenjoey to assess this interest and determine the appropriate next steps with a view to maximising shareholder value and minimising disruption across the group. The review was focused initially on loss-making entities to assess their strategic fit within the EML group and resolve operating losses from business units. The Board and myself are determined to complete this work by no later than the end of the first half of FY ’24”
We believe that the EML Payments share price popped in part because the results were above guidance, and in part because of speculation around selling parts of the business. Generally speaking the gift card segment is considered profitable. That segment might fetch a good price relative to the current share price. Alternatively, sale of the European General Purpose Reloadable businesses could relieve regulatory risk.
Why Did the EML Share Price Crash In The Past?
Since EML payments first revealed the regulatory issues facing its acquired Prepaid Financial Services business, the EML share price dropped from around $5.70 as low as 45c, before climbing back to around $1.10 today.
In May 2021 the Central Bank of Ireland (CBI) raised concerns about the adequacy EML’s subsidiary’s anti-money laundering systems and a remediation program was launched. Originally acquired back in March 2020 for $264.8 million (excluding contingent consideration on acquisition) the ongoing saga has been destroying shareholder value for some time. The remediation costs have been continuing for years despite being classified as ‘non-recurring’. The non-recurring remediation costs totalled $20.5 million in 2023, up from $16.8 million in 2022 and $11.3 million in 2021. Not only that, in March this year the CBI directed that a nil% growth cap will apply for the 12 months ending 31 March 2024. The cap applies a handbrake to growth in the segment and sending cost provisions higher.
Given the state of the European issues it was only a matter of time before the company wrote down its investment.
Both the PFS Group and Sentenial Group impairments were originally flagged in the first half and doubled in the second half. Having purchased both businesses for a combined $368 million the total write down of $263 million doesn’t leave too much value on the table. Continued deterioration in contract performance and slowing growth took the blame. Sentenial itself was subject to a large-scale merchant fraud in August 2022, incurring further costs.
“We also took an impairment charge in relation to our PFS Group and Sentenial Group acquisitions of $189.7 million and $69.2 million, respectively. I would note that these are non-cash items and do not impact our underlying profit.”
So fear not, no cash or underlying profit was harmed in the making of these impairments; we are apparently supposed to just disregard the acquisition payments made in previous financial years.
A long term transformation strategy was outlined back in November 2022 under then CEO Emma Shand but after less than 10 months, Shand was out; replaced by current interim CEO Kevin Murphy. This change came with a further strategic review.
Murphy himself is a former Managing Director of Bank of Ireland (cards business) and boasts significant regulatory experience. Clearly with this appointment, EML are hoping this will expedite the process of squaring things off with the CBI.
Under Murphy’s guidance the board has outlined four operational priorities being remediation, cost optimisation, growth in core business, and talent retention. At this stage management has deferred providing guidance for FY24 until its AGM.
While the EML Payments share price pop after the results brings relief to long suffering EML Payments shareholders, the current price is still a long way away from the lofty $5.75 peak of April 2021.
With a clean up of acquisitions and a clear view to streamline the business ready for sale, the best case scenario for EML is probably a bidding war for EML’s better performing assets.
Personally, I’m steering clear of EML Payments despite the improving narrative. While there has been work done to simplify the business, it is still very difficult to understand the risks. That’s how shareholders (and EML management) were bamboozled by the PFS Acquition. Nonetheless, the approach of the current board does seem appropriately oriented towards realising the value of EML’s less risky gift card business, within the next few years.
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Disclosure: The author of this article Nick Maxwell does not own shares in EML. The editor Claude Walker does not own shares in EML. Neither will trade EML shares for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).
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