Technology

Has EML Payments been seriously oversold?

Tue 26 Apr 22, 5:45pm (AEST)
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Key Points

  • EML cut earnings guidance for the full year by -8% to $55m
  • Management attributed declining guidance to a turn for the worse in foreign exchange rates, higher overheads, and the major slowing in the launch of new programs
  • Macquarie expects EML to benefit from the impacts of interest rate forward curves on its $2.7bn stored client balances and expects interest on stored balances will peak at 1.7% in FY24

Shares in troubled EML Payments (ASX: EML) were in freefall today – plunging 38.56% (to $1.66) - following the release of a trading update within which the payment processor cut earnings (EBITDA) guidance for the full year by 8% to $55m.

The tough loved dished out to EML today, which follows a tough third quarter - which saw the company post a 22% decline in underlying net profit - should remind investors of the dangers of buying stocks, and parking them in the bottom drawer, and especially high-growth tech stocks.

But in fairness to EML, should guidance be met, profits will have risen 40% since 2019. So the market’s reaction today may have had more to do with not meeting expectations, than a dismal result per se.

What happened to guidance

Management attributed declining guidance to a turn for the worse in foreign exchange rates, higher overheads, and the major slowing in the launch of new programs.

Then there was a delay in the regulatory approval of a EUR bond investment, which knocked around $2m off projected pre-tax profits.

Management also noted "operational execution issues in Europe and a more risk averse approach to new programs."

"We now anticipate continued challenges through Q4 which has led to a reduction in the guidance range," EML stated.

Core earnings are good

Despite these issues, management also reminded investors that core Australian and North American businesses are performing in line with expectations, with year-to-date revenue up 20% on the previous year.

Assuming revenue continues to grow at the current rate, and management keeps a handle on operating costs, Intelligent Investor suspects there’s a good chance profits might double their current level by 2025.

The fund manager expects rising interest rates to add an extra kicker to profits due to income earned on stored balances on EML cards.

The fund manager also notes management’s expected investment in sterling and euro bonds could add $6m-$10m to $2023’s pre-tax profits, while cost cutting programs might save $4m-$5m.

“Those two things alone could add $10m to net profit, which ignore growth in the underlying business,” the fund manager notes.

“Yet the company continues to sign new partnership contracts, 23 this past quarter, including two that could add meaningfully to revenue as they ramp up.”

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EML Payments share price was seriously sold down today.

What do brokers think

Intelligent Investor upgraded EML to Speculative Buy last month and notes that another profit downgrade suggests management either doesn’t have a good grip on the company's finances or leans towards overconfidence.

The fund manager suggests buying below $2.50 and holding up to $5.00.

Based on the brokers that cover EML (as reported on by FN Arena) the stock is currently trading with 150% upside to the target price of $4.17.

Macquarie expects EML to benefit from the impacts of interest rate forward curves on its $2.7bn stored client balances and expects interest on stored balances to peak at 1.7% in FY24.

The broker expects the removal of the Central Bank of Ireland growth cap to support the growth of the company's gross profit ratio in FY23 and maintains the Outperform rating with the target price increasing to $3.95 from $3.80.

UBS expects positive medium-term implications from EML providing its payment platform to Up Spain - one of the three largest providers in Spain - and maintains a Buy rating and $4.55 target.

Consensus on EML is Strong Buy.

Based on Morningstar’s fair value of $4.22, the stock appears to be undervalued.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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