Finally had the chance to work through the EML 1HFY24 results after all the excitement with the Sentenial sale. I prefer HY-o-HY instead of PCP comparisons, so reworked some of the numbers to give me that view. It also helped that EML management is now focused on the Core business segments, so they have taken pains to focus on, and publish, H-o-H performance.

Summary of the key Group numbers, green shows growth, orange are flat to down

In summary, and the rationale for my top up of 0.25% IRL and in SM today:

1. The underlying EML business in the last 18M has been growing nicely across the key metrics, stripping out the impacts of the PCSIL and Sentenial remediation costs and isolating post-disposal impacts. This is summarised in the table below - green is growing, orange is flat to backwards.
2. Expecting EML to meet or exceed underlying EBITDA FY24 guidance - at the half year mark 53.3% of the mid point guidance has already been met.
3. Continued strong interest income revenue - interest rates likely to remain higher for longer, which is a good tailwind for EML revenue
4. Strong cash generation
5. Upside from cost remediation efforts as costs remain high and management is very focused on this.
6. Risks of another (stupid) acquisition will be remote for at least the next few years (we would hope).
7. By getting rid of PCSIL and Sentenial, EML is essentially back to being the company it was prior to the acquisition - it was a much-loved growth company. As both acquisitions were entered into when the EML price was $3.75 (PCSIL, 31 Mar 20 announcement) and $3.89 (Sentenial, 30 Sep 21 completion) (1) the core business has still been growing, and (2) we have the tailwind of high interest rates, it would appear that a re-rating to perhaps ~$3.00 is not an unthinkable scenario now.

Risks

1. Sentenial sale does not complete - low risk, it would seem
2. Another stupid acquisition - low to none, for the next few years perhaps
3. Further Board instability - low, given how the Board has stayed the course in the last year
4. New CEO - always a risk (think Emma Chand), but EML is on a much clearer and firmer trajectory now for the Board to stuff up the appointment.
5. Growth stalls due to macro factors - medium risk if Central Banks overreach and cause a major recession. an inherent risk.

At peak, my paper loss was close to 85%, and I was completely anchored to the loss. It took a lot of effort to un-anchor this negativity.

I now feel EML is back on the right path again and the growth ahead looks bright. My conviction for EML has now turned from negative to high, enough to top up 2x and bring my average cost down to a reasonable $2.31. Whether this was a right move will be revealed in the fullness of time!

Discl: Held IRL and in SM

1HFY24 Summary Slides

Further notes in digesting the Sentenial sale announcement:

• Non-Core to the Group’s operations as it is unprofitable (estimated ~A$2m EBITDA loss in FY24), does not have any material product overlap with other EML Group business lines, and is separable from the Group’s wider business
• Significant milestone to the delivery of the Group’s Strategic Review
• Sale price is subject to (1) customary completion adjustments for working capital and net debt (2) potential downward price adjustment, capped at EUR7.5m linked to ongoing key contract performance in the period up to completion of sale (3) earn out based on recurring revenue from new contracts signed by the Sentenial business from 1 Feb and 30 days after Completion.
• Completion is not subject to financing
• Expected to be completed within 3 to 6 months and is subject to approval from the French and UK financial regulators

@jimmybuffalino , @thunderhead , as a long-term shareholder, I share your sentiments with the overall Sentenial debacle. I had very low expectations of a meaningful sale price, as I was more looking forward to EML minus Sentenial, so am simply esctatic at the sale, whatever the price. It just releases EML from the ongoing burden that PCSIL and Sentenial have inflicted.

I topped up in late Jan when the PSCIL wind down was announced, looking to top up again today as the Sentenial sale was an earlier defined trigger point. Hoping that with both out of the way, EML can refocus and go back to becoming the growth company it was, hopefully that much wiser about making dumb-arsed acquisitions in the future!

Discl: Held IRL and in SM.

Finally got round to working through what to do with EML after the recent AGM and price crash. Went back to the FY22 Annual Report and laid out the key numbers from FY21-FY23 in a xls to make better sense of what has happened - I find summarising this 3+ year horizon into a format which I am comfortable with from the Annual Reports provides me with significantly better picture of the commentary rather than the usual YoY or PCP basis.

Disc: Held IRL 1.06% of Portfolio

SUMMARY

• Core businesses continue to grow Gross Debit Volume and Revenue, gross margins have mostly sustained around 65%
• Continues to benefit from high interest rates for EML’s substantial stored float - this benefit will continue for the next 12-18M as interest rates stay higher for longer
• Underlying Expenses, ex-Impairment, have step increased ~26%, a good portion of that is from the Sentiniel full year contribution, impacting Profitability - management has clearly recognised the need to reign this in - cost optimisation is one of its 4 key focus areas
• Cash Flow position has improved significantly - would have been cash flow positive if not for continued compliance remediation spend
• Trading Update for 4M ending October 2023 encouraging - expect to significantly improve FY23 EBITDA by 40-56%, cash flow positive, but will continue to burn~$20m for PCSIL remediation efforts
• Management changes, other than a final CEO, appear to be stabilising, strategy has been revised and is clear, transformation effort is underway
• PCSIL continues to require significant remediation effort focus and is clearly impacting further revenue growth in Europe - Kevin Murphy the Interim CEO seems to be the right person, team to resolve has been expanded, what we now need to see is positive traction via positive Central Bank of Ireland acknowledgement

Portfolio Action

• Current holdings of EML is 1.06% of the portfolio with the average cost of $2.991, down 71.59%
• Happy to continue holding this % allocation on the back of still-robust Core businesses and the eventual resolution of the CBI issues vs exiting with NRV of ~$11k
• Not prepared to add to the holdings at the moment, but will consider this if there is tangible progress on the CBI remediation, as evidenced by formal acceptance of that improvement and/or the progressive removal of growth restrictions

CONTEXT

• Previous long-term strategy was declared flawed by new management as it (1) focused on longer-term aspirations (2) did not account for today’s business challenges which required immediate and concentrated attention (3) did not offer a clear plan to solve these challenges
• More recent acquisitions have not yielded the desired results or given rise to identifiable synergies delivering real value (1) PFS Group operates in a highly technical and evolving regulatory environment in Europe (2) Sentenial Group, slower ramp on anticipated revenues and limited synergies for EML’s open banking business
• Good progress on focus to solve the biggest business challenges today - (1) Leadership & Talent retention (2) Remediation and Regulation (3) Escalating costs and loss-making businesses (4) constrained growth

THE GOOD

• Core business strong and growing, FY23 revenue and underlying EBITDA, outperforming guidance:
• Gifting and General Purpose Reloadable Cards - Australia and UK - strong and growing Gross Debit Volumes and Revenue
• Digital Payments, including problematic Sentenial acquisition - also growing GDV and Revenue
• Gross Margins sustained at ~65%
• Cash balance $71.4m, cash flow from Operations almost at breakeven ($2.6m) vs ($41.5m FY22)
• Interest investment return, a core part of EML’s revenue mix continues to improve - $33.1m in FY23 vs $5.0m in FY22 - will continue to benefit from the global higher-for-longer interest rates forecast
• YTD Oct 2023 results and trend positive (1) Underlying EBITDA up to A$12.5m vs A$3.3m in pcp (2) Revenue is up 39% at A$26.3m, 19% growth on pcp in recurring business revenue and strong contribution from higher interest revenue and yield improvements
• FY24 guidance
• Underlying EBITDA - range of $52-$58m, an increase of 40-56% on FY23 EBITDA of $37.1m
• Cash flow broadly neutral in FY24, including PCSIL’s cash burn of ~$20m. Excluding PCSIL, EML would be significantly cash flow positive in FY24
• New leadership team is settling down after resignation of previous CEO and focused on (1) executing the Transformation Strategy (2) addressing the compliance issues (3) running the core business

THE NOT GREAT

• Declining profitability of 28% YoY
• Overhead costs are 26% higher - at least 10% across each major expense item
• Lower establishment revenue impacted by macro considerations 
• Growth restriction in PFS business in UK & Ireland offset by higher interest revenues across float holdings in Gift and GPR
• 2 very problematic acquisitions - PFS Card Services Ireland Ltd (PCSIL) and Sentenial - major regulatory compliance issues crimping operations, bleeding costs to comply and taking up a disproportionate amount of management attention - progress made but a lot of work left to do
• PCSIL cash burn in FY24 estimated to be ~$20m, elevated cash burn “likely to continue over the mid-term”
• Central Bank of Ireland not satisfied with PCSIL’s remediation plan and completion timetable
• Continued impairments of PCSIL and Sentenial businesses - $258.9m hit in FY23

PROGRESS ON OPERATIONAL PRIORITIES

• PFS business (UK and European GPR business) - made progress, now in embedding phase of remediation, added additional resources to uplift capability to resolve issues with the Central Bank of Ireland in the European business
• Cost Optimisation - simplified operating model, rationalisation of global roles to align to new strategy, identified FY24 cost savings initiatives from further simplification
• Growth in Core Business - committed investment to rebuild Sales, Marketing and Commercial teams

WHAT GOOD LOOKS LIKE

• Continued growth of core businesses while resolving compliance issues in parallel
• Completion of the execution of the Transformation Strategy
• Complete exit of PCSIL or resolve compliance issues - reduce cost burn
• Step drop in Operating Overheads as leaner organisation and cost optimisation kicks in - $10m identified thus far for FY24 execution - not big enough
• Sale of Sentenial - expressions of interest received, being reviewed but no sale forthcoming yet
• Cashflow and EBITDA positive

Just caught up with the AFR on EML.

Alta Fox is behind the moves "It fishes in small caps globally, moving quickly once buying in and often uses M&A to create value". Alta Fox’s entry price was in the 50-60¢ a share range and they first re-entered 168 days ago.

EML is clearly and openly being fattened for the eventual roast ...

Should have connected the dots earlier, duh! to self!

Today's announcement probably says 3 things for me:

1. The CBOI issues require someone with seriously strong expertise to deal with (duh!) and Emma was more a grow sales vs fix-mess CEO. Kevin sounds like he has the right expertise and experience to focus on the CBOI mess. That he would take the job on would hopefully mean he CAN see a way out? POSITIVE
2. The Board has formalised the dumping of the old strategy to now focus on operations to plug the big holes - again, duh! It means that the Board has fully internalised the fact that they were with the fairies and need to come back to reality - POSITIVE (as in better than doing nothing or staying the course with the old strategy)
3. Formal notice that EML is up for sale, either in sum or in parts - not surprising given that the other parts of EML are still running well, but this will limit the ability for the share price to fully get out of this deep hole.

Discl: Holding IRL (very painfully).