As disclosed in Glennon Small Companies’ (ASX:GC1) February Monthly NTA and Investment Report, EML Payments (ASX:EML) was one of our top three performers in February. So far we have made over 30% return on this investment. We are still holding the shares because we expect EML to continue growing, driven by store re-openings and further penetration into fast-growing industries. We expand on this thesis below.
EML is a provider of payment solutions for payouts, gifts, incentives & rewards and supplier payments.
The business model is summarized in the above graph. EML issues mobile, virtual and physical card solution to its clients. Its revenue comes from three primary components:
1. establishment fees;
2. transaction fees; and
Let’s use one of EML’s clients West Edmonton Mall, as an example.
- West Edmonton Mall orders gift cards from EML and deposits the funds to EML.
- EML issues the cards and collects establishment fees.
- West Edmonton Mall sells the gift cards to shoppers.
- Shoppers use the card to shop at the mall.
- EML pays the transaction volume (‘gross debit volume’) to merchants, collecting a tiny cut from the transaction volume in the form of transaction fees.
- EML gets interest revenue from the unspent funds in the card.
- When the gift card expires, EML pays the remaining unspent funds back to West Edmonton Mall, after deducting a cut of those funds which as known as breakage.
EML separates its businesses into three segments as shown above. We choose to focus our investment thesis on the Gift & Incentive and General Purpose Reloadable business segments which collectively account for 94% of group revenue.
Gift & Incentive: Benefit from reopening
During the last few months, EML’s Gift & Incentive segment has suffered a big hit from government restrictions on shopping centres. This has affected volumes for its non-reloadable cards, dominated by shopping mall gift cards. Transaction volumes and revenue are down 19% and 13% respectively
However, with vaccination programs already well underway, we expect a rapid recovery in this segment.
General Purpose Reloadable: Fast-growing clients
This segment refers to reloadable cards usually created for special purposes. For example, EML is issuing Opal Card Digital on behalf of NSW Transport. Once this project is rolled out successfully, passengers will be able to use their phone to pay for public transport in NSW.
As opposed to gift cards, which are usually one-off purchases, reloadable cards provide EML with high visibility in revenue and GDV.
We agree with management that this segment of EML has promising exposure to a diverse range of fast-growing industries such as gaming (PointsBet), Buy Now Pay Later (Fu and Laybuy) and cryptocurrency (Coinjar).
EML was impacted heavily by the pandemic and today its shares trade below pre-pandemic levels. Despite making a quick 30% return on the shares, we still hold a position subject to our investment case remaining on track.
Till next week, happy investing.
Michael and Kenny