EML Payments stays committed for growth

Opinion

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The rapid growth of fintech stocks has seen some shining Australian startups deflate somewhat in more troubled times.

EML Payments (EML) has faced a sharp share price decline in the last 12 months because of temporary financial costs, but it may be an exciting proposition for the long term as fintech looks to endure and remain robust.

The Brisbane-based prepaid card services, open banking, and foreign exchange solutions provider remains committed to its core business.

And its disciplined commitment may be considered wisdom-like, with the Company focused on development of it’s core products and present valuation making it an attractive stock to consider for the long run.

Fintech vs Global Finance

Global finance is changing rapidly, led by record fintech growth. These slick, low-cost startups are moving on traditional banking at pace.

The new frontier sees payment and cross-border transactions becoming an everyday part of life worldwide as people look for more accessible money-moving options.

Payments, especially prepaid cards, digital payments, cross-border transactions, and business-focused payment systems, are growing substantially as more people look to more straightforward solutions.

Many, including the UK-based Revolut and companies such as Wise, have become centre stage in replacing banks and have become the Uber in this Brave New World scenario.

It’s little wonder when you consider their better fit into the zeitgeist, often presenting cheaper, easier alternatives to traditional financial products.

The push is expected to grow fintech by at least 25 per cent before the decade’s end.

And Australia is no exception, witnessing growth at a record pace, and according to Austrade, the fintech industry in Australia has grown from $250 million in 2015 to $4 billion in 2021.

That means that by 2030, that number could quadruple as many consumers increasingly look for fintech solutions to replace traditional bank offerings.

EML Payments is at the centre of the storm with its services, which will soon be welcome as a mainstay credit card while offering more than 23 multi-currency accounts.

It will also provide an open banking solutions system that allows customers to get paid in real-time cost-efficient, allowing seamless transactions for small businesses.

Crunching the Numbers

EML payments have been growing relatively fast, including 21 per cent organic revenue growth, with gross margins currently at 68 per cent.

FY22, the direct sentinel debit and open banking volumes increased by a whopping 654 per cent. Meanwhile, gross debit volume surged 308 per cent for the year, reiterating that the stock probably does not reflect the business outlook.

“My early conversations with key stakeholders have been very constructive and helpful in shaping my immediate focus. It validates to me that whilst we have a strong base, it is time for a proactive strategic review of all aspects of the business.”

“From what I have already learned, I am highly enthusiastic about EML’s growth and value potential. However, we won’t successfully deliver the improved value of those opportunities for our shareholders if we don’t take a good hard look at how best to set our operating structure and align our capabilities, systems and processes to execute effectively for growth.”

Newly appointed Managing Director and CEO Emma Shand

Financial Outlook

EML’s temporary downturn could quickly turn around due to several factors, including interest rates, which are also rising.

It should benefit from a large, stored value float into short-term securities.

With up to three more rises forecast, the overwhelming trend from the financial services sector is margin rises in the order of 1 to 2 per cent.

This windfall should help profits as the company looks to get back on track.

The reality was always that low-interest rates were permanently untenable, and savers or financial institutions that reinvested their float were temporarily at a disadvantage, even though that disadvantage has lasted close to a decade.

But now that interest rates are heading back to normalizing. The situation should improve and get back to normality.

While recession risks threaten to push interest rates back down, things remain steady now.

Valuation-wise, the company remains relatively cheap, with price-to-earnings currently trading in the range of around 8x.

The company witnessed its financials deteriorate as the class action lawsuit weighed on results, with reported EBITDA falling by 19%.

This was a one-off event, and investors likely overreacted to the fallout from the class action, which revolved around improper disclosure of information to shareholders over the acquisition of PFS.

Considering the rate of growth is unlikely to slow down despite global headwinds,  it remains on a solid footing to continue its run of form.

The forward price-to-earnings should only further fall as the next couple of quarters see’s increase in profitability on the back of improved margins.

Considering the gross margins remain around 68 per cent, the long-term net profit margin could be somewhere in the double digits, much higher than what they are now.

Tailwinds from improved net interest margins, customer uptake, and an increasingly global footprint, make it quite surprising that the company has fallen to the extent it has.

Risks remain as the global economy continues to see headwinds from inflation and rising rates, which could slow down payment volumes, combined with any payment from the class action, could mean one-off financial losses.

But these are not long-term trends, and the companies such as EML remain well-positioned to take advantage of global financial trends.

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