EML Payments Announces New Managing Director and CEO

Emma Shand has been appointed Managing Director and CEO effective immediately. This follows the resignation of Mr Tom Cregan.

First things first – what has happened to Cregan? Very little detail provided about what is effectively an immediate resignation. The following is included in the announcement:

“Mr Martin said, ‘We all owe a real vote of thanks to Tom Cregan who has been an integral part of the EML growth story for over a decade. He has tirelessly led the Company from a small technology business in Australia to a diversified payments leader operating in 32 countries. EML has been an exciting growth story of rapid international expansion, not without its challenges. Without Tom’s deep payments knowledge, drive and commitment, EML would not be what it is today.’

Mr Cregan will receive his contractual entitlements and his equity will be treated in accordance with the terms of grant. No termination benefits will be provided. Ms Shand’s employment terms will be announced in due course.”

Unusual to see a CEO step down without any handover period for the new incumbent. Was Cregan forced to step aside? Has the business been notified that it will face further regulatory pressure once the current growth cap (imposed by CBI) expires, resulting in him running for the hills? A lot of questions remain following the announcement, but my gut tells me it is the former (pushed aside). This is based on some of the comments in the announcement re: how Shand will focus on the European side of the business, and how she has an ‘ideal set of attributes to lead the company into the future’. Further, ‘Ms Shand will dedicate substantive time and presence in Europe’. It seems to me like EML has assessed Cregan wasn’t best placed to take them forward.

On paper, Emma Shand appears impressive. An executive with 25 years’ global experience in tech, capital markets and financial services spanning 30 different countries (more comments about EML’s reach – presumably insinuating Emma is a better fit to lead what is increasingly becoming a global business?). Emma’s experience includes over 16 years in senior management roles with US based market leader Nasdaq. EML stress she has experience working across highly regulated markets – again further comments that maybe she is better placed to tackle the regulatory battles that EML will be faced with as it spans multiple borders, each with different legislative requirements. Given Emma has been a non-executive director at EML since September 2021, you would expect the adjustment period to be relatively smooth sailing.

That said, EML has ultimately failed to address what has caused Cregan’s departure and that will likely result in a panicked market, at least over the short term. 

For those that missed it, there was an interesting article on livewire yesterday - EML or Tyro: Who's the better payments player? 

Shane Fitzgerald from Monash Investors Limited shared a few of his thoughts on both companies. 

I disagree with a lot of Shane’s sentiments re: Tyro, but I won't discuss this here as the Straw pertains to EML Payments.

Relating to EML, Shane talks about his bull case for the company. Many of these reasons are why I have also recently purchased shares in EML. 

For those interested, the article is here. 

DISC: I hold both EML and Tyro. 

EML Payments provides prepaid payment services in Australia, Europe, and North America – essentially in contrast to Tyro, which is involved in taking sales. Its portfolio of payment solutions offers options for disbursement payouts, gifts, incentives, and rewards, as well as white label payments and banking-as-a-service technology. The company issues mobile, virtual, and physical card solutions for various corporate brands. It serves blue-chip financial institutions, nonfinancial corporates, SMEs, FinTech companies, public sector, and NGO bodies. 

The company was formerly known as Emerchants Limited and changed its name to EML Payments Limited in November 2016. EML Payments Limited was incorporated in 2003 and is headquartered in Brisbane, Australia. It listed on the ASX in 2006. 

What I like
•    Experienced management team
•    Strong balance sheet - $140m cash reserves and no debt. 
•    Regulatory and compliance barriers to entry make it more slightly more difficult for competitors – somewhat of a moat 
•    Revenue continues to grow strongly – $192 million reported in the FY21 annual report, up 60% on FY20 and surpassing management’s previous guidance. 
•    GDV key metric to assess over time – up 42% on FY20. 
•    Diversified global operations – around 60% of revenue coming from Europe, over 25% of revenue from North America and the remainder from Australia. 
•    Large parts of Europe have shown a willingness to return to normal life and ‘get on with it’ in the face of the pandemic – this is in contrast to many other parts of the world, e.g., Australia & NZ. With higher rates of vaccination across Europe, the company shouldn’t be too impacted by the pandemic like many others. The recent eofy results – which were bloody impressive – also suggests strong resilience in the face of external pressures. I expect stronger results across Europe and the US in FY22, with these areas increasingly returning to their ‘normal’ – or at least trying to.     
•    Forecasts a profit in FY22. 
•    Committed to environmentally friendly options through its ‘change for good’ initiative. I like to see this in companies I invest in today as I think ESG will continue to grow in importance over the next decade.

What I don’t like
•    Low amounts of insider ownership 
•    CEO’s actions to sell before recent regulatory news hit the market 
•    Recent regulatory issues may continue to impact the company going forward 

I think the recent sell off (following the regulatory issues) has created an opportunity to invest in a high-quality company at a decent price. I wanted to understand more about the regulatory issues prior to investing, and how they might impact the company going forward. The company’s recent annual report indicates the regulatory issues caused it to incur costs and provisions of $11.4 million in FY21. They don’t discuss future costs which may arise (I don’t think?), but if this is the bulk of the ‘punishment’ in relation to the regulatory issues I think it’s a positive result. 

The company has provided some pretty lofty forecasts for FY22, but their impressive performance over several years and their tendency to overachieve makes me confident that management is up to the task.  

I am willing to back this one long term. The thesis primarily relates to continued growth and expansion, with the company in a good position (in the next 12 months and onwards) to reinvest future profits back into the business.

As always, appreciate any thoughts/bear cases! 

DISC: added to Super portfolio, with a portfolio weighting of approximately 7%.