Pinned straw:
@thunderhead , very fair comment around the impact of interest rates on EML's interest income. Intuitively, as interest rates fall, EML's interest income should fall, negatively impacting earnings and hence negatively impacting the share price. The fall in the price post the FY24 results bothered me somewhat as I was questioning whether I had doubled down on the wrong end of the rates cycle.
To work out the correlation, I plotted each RBA rate change since EML listed in ~2013 against EML's share price. The dots are placed on the approximate date where the rate changes occured (had no space to make the dots any larger!)
Red Dots = rate DECREASES, which should negatively impact EML earnings based on the reasoning above (hence Red)
Green Dots = rate INCREASES, which should positively impact EML earnings (hence Green)
Interesting Perspective
When Rates were DECREASING in the ~2013 to ~2020 period, EML's share price was generally trending UP - it went from a ~$0.20 stock in 2013 when the Cash Rate was 2.5%, to its peak of ~$5.68 in early 2020 when the cash rate was 0.75%.
2019 to 2020 was a disaster year when all the PCSIL dramas erupted, and the price crashed to $1.25 when the Cash Rate was 0.5% - clearly, EML-specific issues drove the share price then.
CY2020 to April 2021 saw the price spike from $1.25 to $5.89, its all-time high when the cash rate was still FALLING from 0.5% 0.1%.
CY2021 to mid-CY2022 was disaster period 2 post the Sentenial Acquisition and more PCSIL dramas and the price fell to $1.25 again. The Cash Rate INCREASED from 0.1% to 2.35% in that time. Since mid-CY2022, the cash rate increased to 4.35% while the share price fell to its all time low of ~$0.40 through to current day $0.665.
So, based on the history, the impact of Covid, the big dramas around PCSIL/Sentenial, it actually appears that the EML price has actually moved broadly in the opposite direction of changes in the cash rate. The EML price has made its best gains when the rates fell, Conversely, rate increases have done very little to the price.
This is terribly counter-intuitive, I have to say. But it lines up with EML managements comment in the results call that managing interest income is BAU really, regardless of where the cash rates are.
What Does This Mean
The perceived negativity of the imminent fall in the Cash Rates in CY2025 on EML's earnings is very much in play currently, I suspect.
But the facts around the historical EML share price does not quite support that negativity. The very bullish view would be that rate cuts actually seem to play in EML's favour. The mild bullish view would be that there is no tangible evidence that rate decreases have previously depressed EML share prices.
With this rates analysis out of the way, my view is that EML is in a very good place from a turnaround perspective. The bad stuff has been decisively cremated, new management with good industry credentials are in the driving seat, there is laser focus on EML 2.0 going back to its core businesses in terms of driving revenue growth and containing costs. Further progress will take time to wash through, given cost of living pressures and business cost pressures, and patience is absolutely needed.
I topped up in late Aug at 73c, and will top up again if the price dips below say 55c.
Discl: Held IRL and in SM
Thanks @jcmleng for the detailed response and work in correlating the two variables.
I am also in the camp that thinks if the market is reacting to lower interest-related income, it has gone way too far. There are other second order effects of looser financial conditions (increased spend, higher take up of credit etc.) that clearly play into EML's favour, which are not being considered.
Am I brave enough to back that view though, given the capital I have already sunk into EML (a position that is well underwater and has been for most of the time I have held it barring that specatular run in 2021)? I'm not sure.
I am also in the camp that thinks if the market is reacting to lower interest-related income
I'm not sure the market thinks interest income will decline, but rather that the business itself seems to have rising costs and lower growth which were papered over by rapidly rising interest income. The exit yield was 3.6% but the annualised yield was only 2.9%, so there is space for rate cuts before interest rates would show up as falling revenue. However, if you look at where the growth at the segment level came from it was interest related income. And a bit more worryingly, costs also grew quite quickly.
So the picture is a bit murky right now. Add into that you had a high conviction investor in Alta Fox who had also wall crossed themselves (so presumably had pretty good inside knowledge of the business) selling out, and where the SP is kind of makes sense.
I think you are probably right @thunderhead that when consumer confidence picks up again these guys will do well or at least we'll get a better read on how the underlying business looks after the last few years, and unless you believe that we're going back to ZIRP then the interest rate story isn't as important as growth in the payments business.
These two slides show how much of the "growth" has come from rising interest rates.
