EML finds two targets

Prepaid payments company EML Payments is a recent addition to our Buy list, albeit a riskier one given its surging price. We upgraded it anyway, noting its capital-light model, inherent optionality, strong lock on customers and quality management. Taken together, these presented an attractive upside-scenario that balanced the ratio of risk to reward.

Since then, the stock is up a little and it hasn't taken long to get our first bits of news. The company has announced two new purchases.

The first of the two is an agreement to purchase software from PayWith Worldwide. EML previously had a 19% stake in PayWith, which will be offered along with US$1m as consideration. The software supports EMLs salary-packaging vertical, and while it will result in a non-cash impairment of A$1m, the company will now own and control its own technology. 

This, alongside a buy-back of a contractual agreement with a salary packaging consultant will cost the company $3.5m, but will pay itself back quickly as $1.8m in ongoing costs are stripped out.

The second concerns PerfectCard - EML is buying the 25% it doesn't already own for €2.9m. Perfectcard is the first authorised eMoney institution in Ireland and is regulated by the Central Bank. eMoney institutions aren't quite banks but can offer a number of traditional banking services like taking deposit and processing payments. They differ from banks, however, in that they only offer digital payments, they don't sell advice or investment products and they're not allowed to take on credit risk with deposits. 

This purchase means EML can self-issue more of its cards and is less reliant on third-party sponsor banks. The knock on effect will be improved gross margins, where management is targeting 80%, up from the current level of 75%

The acquisitions don't have a material effect on our overall valuation of EML - but they do signal a willingness to forgo near-term numbers for long term profitability. We'll update members again when EML reports later this month and with the stock still slightly below our buy price, we continue to recommend a Speculative Buy for up to 2% of the portfolio of risk-tolerant members.

Disclaimer: The author owns shares in EML Payments. 

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