EML Payments Earnings: Shareholders Likely Better off Without Troubled European Business

We retain our AUD 0.80 per share fair value estimate for no-moat EML Payments EML. This is based on an equal-weighted probability of retaining its troubled European business Prepaid Financial Services in which case our fair value estimate would drop to AUD 0.60; or shutting PFS, which increases our fair value to AUD 1.00. Fiscal 2023′s underlying EBITDA of AUD 37 million was AUD 12 million above our forecast. However, this involved adjustments for remediation and restructuring costs deemed nonrecurring, which we doubt.

Excluding these adjustments results in EBITDA of about negative AUD 3 million. This is below our projected AUD 3 million, despite gross profits beating our forecast by 3% from higher volumes. Our valuation which includes PFS remains unchanged at 0.60, with higher volumes being offset by escalating operating costs. We assume further restructuring costs, step-ups in compliance and audit costs, and wage inflation.

We believe shareholders are better off without PFS, as its retention would likely increase overheads and reduce profits. Compliance/regulatory costs after misconduct are often permanently ingrained—a risk particularly relevant for EML, known for its delayed remediation efforts. We expect underlying EBITDA will further compress from fiscal 2023 levels in the next five years. Growth in overheads—which comprises a step up in regulatory compliance costs—is expected to outstrip revenue growth. Specifically, we see slower growth in the reloadable cards business, due to preexisting growth caps and reputation damage that inhibit new reloadable card customer wins.

Furthermore, remediation and cost-cutting are likely to distract from growth investments, which could undermine EML’s competitive position. Disclosure of new client wins has significantly diminished. Revenue yields at the group level also declined from the prior year, potentially from competitive pressures.