CEO Emma Shand has resigned from troubled payments player $EML. Kinda inevitable given the patently failed strategy to address the regulatory issues in Ireland. Unclear to me what the "new operational priorities" are...or rather, they are clearly listed but I'm unclear how they are different to the last lot.

Key Highlights:

● Appointment of interim Group CEO, Kevin Murphy, an experienced payments and business turnaround executive based in the UK and Ireland, replacing Ms Emma Shand, effective immediately

● New operational priorities focused on solving the challenges facing the business today

● Appointment of investment banking advisers, Barrenjoey to commence the previously announced strategic review

https://emlpayments-stagingcms.bla.bio/wp-content/uploads/2023/04/2924-02654816-2A1443761.pdf

Disc: Not held

OK, so it is more bad news. $EML has reported on the latest letter received from CBI.

The letter states that "CBI has stated that it considers that PCSIL has made limited remediation progress to date with significant and ongoing deficiencies remaining in PCSIL’s AML/CFT control framework. CBI also notes that it is not satisfied with PCSIL’s remediation plan and timetable for completion." 

The rest of the release dimensions the limited nature of the impact and foreshadows the potential for future write-downs.

For me, this is now the final straw, and I have this morning exited my RL position at $0.55, with SM to follow.

$EML has been at this remediation effort now for two years. The new CEO, picked as the person with the capabilities needed to lead the business through the current challenges, has had 6 months, launched a new strategy, and given the current remediation efforts support. Huge overhead resources and costs have been added to the business to focus on remdiation, regulatory compliance and risk management. Any yet, two years down the track, the regulator essentially says "not good enough".

My thesis for holding was that underneath all this, there is a solid business, growing rapdily, positioned in the fast-moving open-banking sector, with the prospects of profitability in the medium term, and the potential to become a leading global payments business. I was prepared to be patient with a 2 year horizon to see returns.

However, the thesis rested on an assumption that management is capable of operating in a highly regulated environment. All competitors in the field have to deal with fraud, hacks, AML measures, etc. $EML have been unable to demonstrate to me that they have the requisite capabilities.

In terms of lessons learned, I took a calculated risk as I believed that the upside (if the thesis was proven) was very large. I also knew that I was holding a stock that could go to zero. My confidence in the bull case is today seriously undermined, so at least I limp away with some capital to redeploy. I am content with my decision-making process. As investors, we take risks.

Disc. Not Held IRL; Selling in SM.

Oh well, wishful thinking on my part. The Halt is due to a letter received by PFS from Central BoI. Good news or Bad, let's see.

If its bad news, it will not be a good reflection on the management and Board changes or the early days of the new strategy.

But, I am getting ahead of the facts.

Disc. Held.

$EML, which delivered its results yesterday, has paused trading pending an announcement.

Are we about to see it be taken out?

Disc: Held

$EML reported their 1H FY23 Results this morning.

Their Highlights:

• Group Gross Debit Volume of $49.4 billion, up 55% on PCP, reflecting the benefits gained from the Sentenial acquisition

• Group Revenue of $116.6 million, up 2% on PCP, largely due to a significant increase in interest income of $7.1 million

• Underlying Gross Profit3 up 5% on PCP, driven by increased high margin revenues from Sentenial and interest

• Group Underlying EBITDA4 of $13.4 million, a decrease of 50% on PCP, largely reflecting increased underlying overheads as we continue to invest in EML’s European businesses

• Group Underlying NPATA of $0.7 million, down 95% on PCP, reflecting the same factors which reduced EBITDA

• One-off, non-cash impairments of $121.3 million against the PFS Group and the Sentenial Group

• Group net loss of ($129.9 million) largely reflecting the non-cash impairments

• Continued strength of Balance Sheet and Cash position, with cash balance up 7% to $79.2m on PCP and underlying operating cashflow conversion of 102%

• Underlying EBITDA guidance reaffirmed

• Execution of the Company’s transformation strategy, including progress with remediation activities in the UK and Ireland, streamlining the organisation and launching a new campaign in Human Capital Management 

My Takeaways

First, I acknowledge that I should have put this one down a long time ago, and it is quite close to the bottom of my conviction list. (And it is much more fun writing up results from $WTC.) All that said, these results present some evidence of stabilisation.

The impairment was inevitable, given everything that has happened over the last 2 years. Reversing that non-cash item out, statutory NPAT loss actually narrowed over the PCP.

Revenue growth was achieved thanks to higher interest rates generating interest income.

We are now seeing the full effects of the extra costs of overhead, representing all the resources that have been added to improve governance and regulatory compliance - employee expense up to $40m from $30m. Plus they are burning a steady $15m, ($30m/yr!) on professional fees, of which I assume a lot is lawyers. There is also a large bucket of $15m other expenses, which includes a variety of elements including risk and compliance. So the costs of risk and compliance appear to be spread over a number of categories and are representing a very material sum.

After everything, cash increased, thanks to the offloading of some financial assets.

These are just a few quick reflections. I'll be recording the call at 10am AEDT, as I'll be watching the Richard White concert live. I am very interested to hear what Emma Shand has to say, particularly in the Q&A. She has been on board long enough to have her arms fully around this. Whether I stay or finally go will rest on this, I expect.

Disc: Held IRL (0.75%) SM (2.9%)