Despite broadly missing consensus estimates with first quarter FY23 revenue falling 5% and warning that costs were up 29%, embattled EML Payments (ASX: EML) was up 13.21% an hour out from the open following the struggling fintech’s AGM market update this morning.
What appears to have excited investors, who have witnessed the share price yo yo south following a litany of bad news – the most recent being another regulatory blow, this time in the UK – is new CEO Emma Shand’s frank admission of the group’s major shortcomings.
Shand also outlined a transformation strategy designed to reposition the company for growth.
In short, Shand reassured shareholders that the new strategy can fix the business by strengthening risk controls, driving cost outs and improving integration and cross-sell opportunities.
Shand admitted that the six prepaid card businesses acquired between FY15 and FY21 were left to operate in silos, missing an opportunity to integrate and extract synergies.
Shand concluded that unintegrated acquisitions, with their fragmented technology and processes, impacted operational efficiency, and masked valuable insights into customer and product profitability.
Shand notes the strategic review, which looks beyond the business and into its global markets, recognises that the payments industry will go through a period of radical transformation-with Open banking set to become a game changer.
“Today, we start a three-year transformation to focus the business for responsible growth and to be future fit to successfully compete in the world of payments over the coming five plus years,” Shand noted.
“… payments companies will have to offer specialised product and customer value propositions… driven by meaningful data insights; underpinned by scalable technology and have compliance and operational capabilities that allow quick time to market and quick time to value.”
While driven by five key enablers, Shand notes current regulatory remediations are a clear catalyst for the transformation strategy.
Six key priorities outlined by Shand include:
Transforming customer journey and service delivery.
Right-sizing the organisation with a structure aligned to strategy.
Rationalising legacy and duplicative technology and modernise core technology and operating platforms.
Creating a single source of data.
Forming a centralised technology, operations, innovation and delivery hub.
Strengthening compliance.
Management notes the group’s serviceable market, which looks specifically at the regions it wants to focus growth opportunities on, is valued at $114bn.
Today EML’s penetration of this serviceable market is 0.15%.
Four new sectors identified, with a global addressable payments market of $704bn include:
Financial services with embedded payments solutions.
Human capital management.
Retail with more than gift cards.
Government, where there is a growing drive to replace cash and paper-based payments with digital alternatives.
The group has successfully concluded its remediation programs in Ireland and the UK and is planning to implement a robust risk and compliance frameworks with a risk aware culture across the whole organisation.
The group is targeting controllable cost out of the business of 10-15% commencing in FY24 with full impact in FY25.
While underlying performance of the business was solid, significantly increased costs impacted full year FY22 underlying earnings (EBITDA), which were down -4% to $51.2m.
General Purpose Reloadable (GPR) volumes were up 9%.
Gross Debit Volume (GDV) is up over 30%.
$2.5m of net interest income in Q1 FY23 versus $1.4m throughout the full twelve months in FY22.
FY23 interest rate guidance is raised from $10m in August 2022 to a range of $17-21m.
Excluding $14m of one-off costs, EML’s guidance for FY23 is:
Revenue of $240-260m
Gross Profit margin of approximately 67%
Overheads of $135-145m
Underlying EBITDA of $26-34m
EML’s share price is down -83% in 12 months and has been trending lower since late April.
Consensus is Hold.
Based on Morningstar’s fair value of $1.76 the stock appears to be undervalued.
Based on the two brokers that cover EML (as reported on by FN Arena) the stock is currently trading with 141% upside to the target price of $1.35.
Following EML’s decision to temporarily cease onboarding new customers, agents and distributors in the UK – after the regulatory body raised concerns – UBS’s Neutral rating and $1.15 target price are under review.
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