As the pandemic has exposed the advantages of diverse earnings streams, EML Payments ((EML)) is expanding into open banking with the acquisition of Sentenial Group. The transition away from gift & incentive cards commenced with a move into pre-paid financial services and now EML Payments has added a further string to its bow with open banking.
Sentenial is a payments platform operating in the cloud that offers direct debit, credit, real-time payment and account-to-account transfers for enterprises and banks. Its key growth business, Nuapay, capitalises on the structural shift in the UK/EU towards open banking and non-card payments.
The purchase price is EUR70m plus an earn-out of up to EUR40m. The latter is contingent on Nuapay achieving a revenue target of EUR30m in 2023. Nuapay is the core growth business, with earnings targets derived from expectations for increased gross debit volumes (GDV) from major customers, new markets and cross-selling.
Canaccord Genuity points out open banking allows third party applications to consumer banking and financial accounts and is likely to be an important offering for emerging financial technology companies, allowing payment products to be embedded in their solutions.
Sentenial, as the core business, processes around EUR45bn in GDV, while Nuapay generated EUR600m in 2020 and is targeting EUR15bn in GDV by FY23.
Open banking remains in its infancy and EML Payments has made a considerable investment to further its exposure, Wilsons acknowledges. While guidance and aspirational targets are arguably “bold”, the broker believes they are still possible, although execution needs to be very good.
With two large clients already on board, Worldpay and Cybersource, Macquarie is more confident the company can achieve its forecasts, although the roll-out to merchants and usage rates will be critical.
EML Payments plans to globalise its platform and Canaccord Genuity believes the attractive nature of this emerging segment is best illustrated by the sizable M&A transactions by major payment providers that are occurring at elevated valuation multiples such as Paypal/Tink and Mastercard/Finicity.
Lofty Expectations
Wilsons expects Sentenial will generate operating earnings (EBITDA) margins of around 40% in FY23 and is aware that Nuapay ramping up GDV to EUR15bn in three years requires significant incremental volumes flowing through the platform.
This may not materialise in the timeframe for many reasons and hence the broker’s forecasts reflect some conservatism. FY21 forecasts are completely unchanged and only a EUR31.5m contribution in revenue is factored in from Sentenial by FY24.
Macquarie also errs conservatively, anticipating only 60-65% of the earn-out will be achieved, although should the target be achieved thereafter, there is an additional 25-30% of valuation upside.
The broker suspects it will take around 12-18 months before there is enough momentum to begin factoring in the upside to forecasts. Management has acknowledged there are some competitors with greater scale than Sentenial, which Macquarie assesses is a risk to EML Payments gaining material share.
Nevertheless, the acquisition provides the opportunity to take part in the structural growth of the industry in the UK and Europe. Outside of this, the broker assesses further upside for EML in FY22 will be coming from a recovery in multi-currency cards and shopping centre traffic and maintains an Outperform rating with a $6.20 target.
Wilsons acknowledges the targets for Nuapay are high but EML is increasingly developing a reputation for executing on acquisitions. If the earn-out targets are met this will materially increase both vertical and geographical diversity as well as revenue and earnings visibility.
EML is expected to become a leading financial technology stock, offering both prepaid and open banking globally. The broker derives a target of $6.51 by applying a 25% premium to the peer enterprise value/EBITDA multiple of 18.5x multiplied by FY23 EBITDA and retains an Overweight rating.
Wilsons likes the stock as the business strategy is becoming increasingly visible and shifting towards a less “lumpy” earnings. Gift & incentive cards are expected to fall from 12% of GDV in FY19 to 5% in FY21, then to around 1% in FY23.
Canaccord Genuity expects investors will value EML Payments on a through-the-cycle basis and, after incorporating Sentenial into forecasts amid expectations from further upside stemming from acquisitions, maintains a Buy rating and $6.25 target.
The company is also in a strong financial position, expected to be net cash by around $120m at the end of FY21. After the first half result, UBS noted the gift & incentive card business in shopping centres was less affected by the pandemic than previously anticipated, so the recovery outlook looks better.
As a result, further upgrade and re-rating potential exists as the market becomes increasingly comfortable with the company’s business profile. UBS has a Buy rating and $5.70 target.
