Why is the EML share price crashing 33% today?

This payments company's shares are falling heavily today. But why?

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The EML Payments Ltd (ASX: EML) share price is having a day to forget.

In morning trade, the embattled payments company's shares dropped as much as 33% to 72 cents.

Its shares have recovered a touch since then but remain down 30% at 76 cents.

Why is the EML share price being hammered?

Investors have been rushing to the exits today after the company released a trading and strategic update ahead of its annual general meeting.

According to the release, EML is planning to refocus on core, profitable and cash flow positive businesses of Gifting, Australia General Purpose Reloadable (GPR), and UK GPR.

This follows a strategic review which found that the company is currently hampered by a number of EBITDA and cash flow negative business lines due to deteriorating customer performance and increasing costs.

As well as being profitable, management highlights that Gifting, Australia GPR, and UK GPR provide for a simplified operating model, reduced management distraction, and reduced regulatory risk profile.

Something that cannot be said for the PFS Card Services Ireland Limited (PCSIL) business, which, as well as having its operations restricted by the Central Bank of Ireland, is burning large amounts of cash.

Management was aiming to transition all businesses to be "break-even or better" in FY24. However, the PCSIL business' cash burn is currently estimated at ~$20 million, with elevated cash burn likely to continue over the mid-term. This is likely to be what is weighing on the EML share price today.

Elsewhere, management is looking to offload the Sentenial business and has received confidential expressions of interest. However, it warned that there's no certainty of a sale eventuating.

Trading update

Failing to lift the EML share price today was its trading update, which revealed strong EBITDA growth, albeit from a low base.

As of the end of October, its underlying EBITDA was $12.5 million, which is up strongly from $3.3 million a year earlier. This reflects growth in recurring revenue and higher interest revenue, which has exceeded growth in overhead costs from its continued investment in the business.

Revenue over the same period is up 39% or $26.3 million to $92.9 million, reflecting solid growth (+19%) in recurring business revenue and a strong contribution from higher interest revenue from yield improvements.

EML expects to report underlying EBITDA for FY 2024 in the range of $52 million to $58 million, which would be an increase of 40% to 56%. However, it only expects its cash flow to be broadly neutral in FY 2024 because of the PCSIL business.

Excluding PCSIL, EML would be significantly cash flow positive in FY 2024 according to management.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended EML Payments. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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