Project Arlo And Global Model Will Streamline Operations

Key Takeaways

• EML's move to a global operating model and Project Arlo aims to boost efficiency, reduce costs, and improve net margins by enhancing synergy and digitization.
  
• Expansion of the commercial team and focus on cash flow optimization is expected to drive revenue growth, strengthen the balance sheet, and increase future earnings.
  
• Execution risks and declining interest rates threaten revenue growth, while rising overhead and investments in new strategies may erode profit margins.

Catalysts

Provides payment solutions platform in Australia, Europe, and North America.

• EML Payments is embarking on a 2.0 strategy, which includes moving to a global operating model to drive efficiency and scale benefits. This is likely to positively impact net margins by reducing silos and improving synergy across operations.
  
• The company is focusing on reviving its revenue engine by enhancing its commercial and product teams, capturing significant market opportunities. This initiative is expected to boost revenue by broadening product offerings and deepening customer engagement.
  
• EML is deploying a single technology platform, Project Arlo, expected to increase operational speed and consistency. This could lower operating costs and improve earnings as manual processes are digitized, enhancing overall efficiency.
  
• The company has plans to expand its business development team and increase its pipeline from current figures to $90 million, aiming for a 20% conversion rate. This is likely to drive revenue growth and improve earnings as new customers and verticals are developed.
  
• EML’s focus on improving operating cash flow conversion and optimizing cash flow management could enhance its balance sheet strength and provide more room for investments, thereby potentially increasing future earnings.

EML Payments Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming EML Payments's revenue will decrease by 0.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.0% today to 10.6% in 3 years time.
• Analysts expect earnings to reach A$24.4 million (and earnings per share of A$0.06) by about May 2028, up from A$4.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$36.5 million in earnings, and the most bearish expecting A$16.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.9x on those 2028 earnings, down from 81.0x today. This future PE is greater than the current PE for the AU Diversified Financial industry at 17.6x.
• Analysts expect the number of shares outstanding to grow by 1.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.15%, as per the Simply Wall St company report.

EML Payments Future Earnings Per Share Growth

Risks

• The loss of several customers in the previous year could suppress future customer revenue growth, which may impact overall revenue projections.
  
• Declining interest rates, particularly in the U.S., could reduce interest income, a key source of revenue, impacting net margins.
  
• The company's history of increasing overhead costs, alongside new leadership expenditures, may erode profit margins if not carefully managed.
  
• Investments in the new EML 2.0 strategy may not yield expected returns, posing a risk to achieving projected revenue and margin growth by FY '28.
  
• Execution risks associated with new market and product expansions, particularly in North America, could impact the company's ability to achieve targeted growth in earnings and revenue.

Valuation

• The analysts have a consensus price target of A$1.241 for EML Payments based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$1.47, and the most bearish reporting a price target of just A$1.1.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$230.1 million, earnings will come to A$24.4 million, and it would be trading on a PE ratio of 24.9x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of A$0.98, the analyst price target of A$1.24 is 21.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.