The EML Payments Ltd (ASX: EML) growth story last year was taking shape to become legendary like ASX growth shares such as Afterpay Ltd (ASX: APT) and Xero Ltd (ASX: XRO). In 2019, the EML share price soared more than 500% following strong growth figures, geographic expansions and a game-changing acquisition.
Following the lockdown measures imposed by a majority of developed countries, EML’s earnings started to feel the crunch and so did its share price, which is down more than 40% since its February highs. As economic activity and social mobility starts to pick up, is EML ready to become a leading ASX200 growth share again?
FY20 highlights
More than 50% of EML’s FY20 revenue came from its gift and incentive (G&I) segment in the form of gift cards for shopping malls. The G&I segment experienced a strong start to the year with January and February volumes up 26% on the prior corresponding period. As COVID-19 hit, its March to June performance was down 32% on pcp. The G&I performance has stabilised with a recovery in European economic activity. June group mall volumes represented 76% of its February 2020 and 73% of June 2019 volumes.
The company’s general purpose reloadable segment (GPR) comes in the form of gaming debit cards, salary packaging and other fintech enabled services. This segment has seen a strong 75.3% increase in revenue driven by organic growth in salary packaging with large scale clients such as NSW Government and Smartgroup Corporation Ltd (ASX: SIQ).
Overall, the group experienced a 25% increase in revenue to $121.6 million and 10% increase in earnings before interest, taxes, depreciation and amortisation (EBITDA) to $32.5 million. The company maintains a strong balance sheet with an impressive $118 million in cash.
Will EML be an ASX growth share in 2021?
Despite a 40% discount from its February highs, EML still trades at a relatively expensive price-to-earnings (P/E) ratio of 86. Notwithstanding the risks to its business model, the company does have many redeeming factors that could see it make a recovery in 2021.
The revenue mix of its Prepaid Financial Services (PFS) acquisition is highly GPR-orientated with product offerings such as banking as a service (BaaS), multi-currency travel cards and fintech services to government, local authorities and NGO. While PFS did experience some impacts to its BaaS revenues and multi-currency program volumes amidst COVID-19, its volumes have recovered to now exceed pre-COVID-19 levels.
The PFS acquisition was completed late FY20 and only contributed one quarter worth of revenues. The full year contribution of PFS revenues in FY21 should see the group’s revenue mix weigh more on GPR and less dependent on G&I and shopping malls. GPR revenues could also further benefit from companies seeking digital payment solutions as part of the global trend to move away from cash payments.
Foolish takeaway
I believe there are many redeeming factors for the EML business driven by its PFS acquisition and increasing demand for digital payment solutions. This could see the EML share price make a return in FY21 and regain its ASX growth share status.
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Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia owns shares of and has recommended Emerchants Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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