After a heavy fall in the EML Payments Ltd (ASX: EML) share price, I think it’s looking like good value for the long term.
Since the start of 2022, EML shares have fallen by around 55%. Since the end of April 2021, EML has fallen by more than 70%.
Neverthless, I think the business looks compelling for the long term at its current valuation.
What’s going on with the EML share price?
There may have been (at least) three different factors that have led to the decline of the EML share price.
A while ago, there was a major concern that the Central Bank of Ireland (CBI) was going to significantly limit the growth potential of EML in Europe amid anti-money laundering and counter-terrorism financing concerns.
Next, there has been intense market focus on the rise of global inflation, leading to worries about how strongly central banks around the world will have to respond to bring it under control. This has triggered plenty of volatility for investors to contend with.
The final thing is what investors may have seen as a negative, that is, the company’s recent update for the period to 31 March 2022.
EML said that while revenue was up 21% to $59.8 million, profitability didn’t do as well.
Quarterly gross profit only went up 17% to $42.2 million. Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) dropped by 14% to $13.6 million and underlying net profit after tax (NPATA) dropped 22% to $8.1 million.
This meant that in the FY22 year to date, operating profit was now lower than the prior corresponding period (pcp). Underlying EBITDA fell 8% to $40.3 million and underlying NPATA declined 7% to $21.2 million.
So, there have been reasons for some investors to be negative in recent times.
But I think the long-term positives can really outweigh the negatives on the EML share price.
Why I like the business
EML shares are now at around the same level as the bottom of the COVID-19 crash in 2020 when there were major questions about how ‘normal life’ would proceed and what this meant for a business that earned a lot from shopping centre physical gift cards.
I also believe that the Central Bank of Ireland issue isn’t anywhere near as detrimental to growth as it could have been.
Higher interest rates could be quite helpful for EML’s profitability, and the EML share price, as it increases earnings from the cash that it holds. It could earn in the tens of millions in the next few years from higher rates, depending on how high interest rates go. Even if EML’s core earnings aren’t as profitable as before (in percentage terms), the higher interest earnings could be a real boost to the bottom line.
The longer-term outlook for the growth of digital payments looks good to me. As well, shopping centre volumes could grow as COVID-19 impacts subside.
I also like the move by EML Payments to enter the European employee benefits market with Up Spain. EML could also grow in other countries where other parts of the Up Group operate. Globally, the employee benefits market is worth over $88 billion and is expected to grow by $20 billion between 2021 to 2025, with Europe representing 35% of the market.
The larger scale should help the operating leverage and profitability of EML.
Finally, I think EML could be a takeover target at this price. If the EML share price doesn’t recover in the near term, then private equity groups like Bain Capital could put in an offer that’s high enough, compared to today’s price, to be accepted by shareholders.
EML recently confirmed that it had been in talks with Bain Capital but those discussions have ceased. However, this shows EML is seemingly happy to talk to interested parties.