The ASX share market has been on a bit of a rollercoaster ride recently, with investors spooked by the prospect of central banks raising interest rates.
This retraction in sentiment has been especially pronounced among the tech sector, as investors become less willing to pay high multiples for future earnings.
Many companies grouped under the tech umbrella have suffered heavy selling. However, one fund manager believes one ASX share has been wrongly assigned to the 'losing bucket' in an elevated interest rate environment.
On the contrary, EML Payments Ltd (ASX: EML) is anticipated to benefit in a world with higher interest rates.
We sat down with TAMIM Asset Management's head of Australian equity strategy, Ron Shamgar, to make sense of this.
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How will this ASX share benefit from higher rates?
Yesterday, the payment solutions company released its results for the first half of FY22. Despite EML's gross debit volume (GDV) growing 206% and revenue increasing 20% from the prior corresponding period, the market dumped the ASX share by 4%.
The EML Payments share price has performed in line with other battered tech names so far this year. Since the start of 2022, shares in the payment technology company have tumbled around 11%. Though, the market might be overlooking EML's built-in rate hedge.
Shamgar highlighted a point in the company's presentation, saying:
Every 1% interest rate rise across the UK, the European region, and the US adds an incremental $15 million of EBIT to EML. Now, they did break it down into more detail. But basically, there are a few more nuances to it, but because they use sponsoring banks in North America, they don't really benefit until rates get to around 2%.
So, therefore, the 1% rate rise doesn't apply to the $2.7 billion [in stored float], it applies to a smaller amount, which works out to be $15 million of EBIT, which is what they articulated.
Furthermore, the fund manager spotlighted EML Payments as "the biggest beneficiary in the small-cap space" from higher rates.
Ironically, with rates going higher — because we have inflation — investors have been selling off tech stocks. Yet a company like EML has been put in that tech bucket, but they're actually going to make lots more profits if rates go up. So inflation and rates are actually meaning that their business is more valuable… It's contrarian to what many investors think.
Could more acquisitions be on the cards?
EML Payments has significantly grown its business in the last couple of years through acquisition. This approach has come with positives and negatives. The major negative has been the Central Bank of Ireland taking issue with EML's PFS Card Services (Ireland) Limited (PCSIL) operations.
The dust appears to be settling on the PCSIL ordeal, letting the company move forward with its next chapter. Could that entail more acquisitions on the horizon for this ASX share?
EML is building sort of a truly global payments business and they're thinking three to four years ahead. They are seeing where payments are going and where the biggest growth areas are. Open banking is obviously a massive opportunity that's got, sort of, unlimited upside.
Shamgar added:
To me, I don't think they'll do any other acquisitions this calendar year, I think they'll focus on showing the market that the acquisitions that they have made are going well. And then maybe next year, they look to do maybe some other deals.
But again, it will have to be something that they don't want to buy something for the sake of it. They're going to buy something because it's going to give them access to certain customers or other certain capabilities that they don't currently have, or new geography, for example.
In afternoon trade, shares in ASX-listed EML Payments are fetching $2.86 apiece, down 1.38%.
