Why EML (ASX:EML) shares could be set for a rebound, but not for the reason you might think

Last week we explored whether EML Payments Ltd (ASX: EML) might be an overlooked inflation play.

The question stemmed from the payment solution company suggesting each 1% increase in interest rates produced an additional $15 million in earnings before interest and tax.

In answering that question, we spoke with TAMIM Asset Management’s head of Australian equity strategy, Ron Shamgar. The main takeaway, EML appears to be well placed in a higher interest rate environment.

While discussing this matter, the experienced investor put forward a case for why gross debit volume (GDV) is less important than what some investors might believe.

What is gross debit volume?

Before we dive into why GDV may not be the most important metric for EML Payments, we should understand what it represents.

In the context of the payment processing world, GDV — or gross debit volume — is the dollar amount processed by the company via its payment platforms. Some other companies might refer to it slightly differently, whether it is gross transaction volume or simply transaction value.

For EML, GDV is the total sum of money handled by its payment solutions. Think of it as the total size of the pie before EML Payments gets to take its own slice.

For reference, the ASX-listed company recorded $31.6 billion in GDV for the six months ended 31 December 2021. Representing an increase of 209% on the prior corresponding period.

What is more important for ASX-listed EML Payments?

According to Shamgar, GDV growth alone is not exactly telling of the company’s performance. The reason behind this is the mix of various ‘take rates’ across different payment types.

Further explaining this, the fund manager said:

[…] if you think about Sentenial GDV, there’s kind of two parts to it. You’ve got the open banking GDV — which comes from Nuapay, which is the open banking subsidiary — that’s the sexy growth part that probably earns 30, 40, 50 bps [basis points]. And then you’ve got a lot of the existing Sentenial business, which processes that GDV, but really earns like 2,3,4,5 bps on it.

So, the GDV number is less important, because you could have a different mix of clips of it. Obviously, gift cards [from the Gift and Incentive segment] are very high at 4% or 5%. And then prepaid is like one and a half percent. And then, banking is maybe 0.3%. So it just depends on the mix in that GDV.

Instead of focusing on the overall size of the pie and trying to guess the composition of different take rates, the fund manager suggests an alternative focus for investors.

I think the way to look at EML is less focused on the GDV — because you never get to know the mix — and more focused on their revenue and margins and so on. I think that has obviously been impacted this year. But, I think we’re going to start seeing that go back up [in the] second half, and then into FY23 and FY24.

ASX-listed EML Payments finished the day with its share price 5.4% lower. The company’s shares are now down 26.1% since the beginning of the year.

The post Why EML (ASX:EML) shares could be set for a rebound, but not for the reason you might think appeared first on The Motley Fool Australia.

More reading

• These were the worst performers on the ASX 200 last week
• Don’t fear the rise! One ASX share that’s ready for an interest rate hike
• EML (ASX:EML) share price sinks 9% despite record-breaking product demand
• Is the EML (ASX:EML) share price the most undervalued growth opportunity?
• Down almost 20% in 2022, is the EML share price now too good to ignore?

Motley Fool contributor Mitchell Lawler owns EML Payments. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended EML Payments. The Motley Fool Australia owns and has recommended EML Payments. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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