The EML Payments Ltd (ASX: EML) share price is lower today, down 1% to $2.96 at the time of writing.
But major broker Macquarie thinks the stock should be trading about 33% higher.
EML Payments is a business that 'powers' payments around the world. It operates across 27 countries with 23 currencies in areas like card payments, open banking, and digital account payments.
EML provides services for the banking and financial sector, buy now, pay later, sports betting and gaming, retail and e-commerce, and government.
Macquarie upgrades EML share price
According to the Australian Financial Review, Macquarie has increased its price target on EML to $3.95, up from $3.80. That implies a potential upside of about 33% over the next 12 months.
The broker believes that EML will benefit from the rising interest rate environment. This is due to the A$2.7 billion that EML held in its stored float as of 31 December 2021. About $2.3 billion was held in cash and $400 million was in "highly rated, low-risk bonds", according to EML.
EML itself said that it "benefits as interest rates rise due to our large stored value float". Based on the current banking arrangements, if rates across all jurisdictions were to rise by 1%, this would add $14 million to $15 million to EML's earnings before interest, tax, depreciation, and amortisation (EBITDA).
EML previously announced that it is looking to increase the size of its low-risk bond portfolio to offset negative interest rates on Euro balances. This is expected to help improve returns in the second half of FY22.
The AFR reported comments made by Macquarie:
Based on current one month OIS forward curves (as at 28 March) and varying arrangements across jurisdictions we estimate EML's effective interest rate on stored balances peaks at ~1.7% in FY24. All things being equal this would imply ~$45m of interest revenue upside, which has no associated expenses.
EML share price valuation
Macquarie's profit estimates put the EML share price at 21x FY23's estimated earnings.
But Macquarie isn't the only broker that is positive on the business.
For example, UBS also rates EML as a buy, with a price target of $4.55. That implies a potential upside of more than 50%.
UBS is a fan of the recent move by EML to enter the European employee benefits market with Up Spain, covering meal vouchers and employee benefit solutions. Globally, the employee benefits solutions market is worth $88 billion, with Europe representing 35% of it.
Up Spain is one of the three biggest providers in Spain, with more than one million users across approximately 4,700 corporate clients and a network of more than 30,000 restaurants in Spain.
Up Spain is a subsidiary of Up Group, which offers employee benefits and incentive programs in 28 countries.
