Is EML Payments worth $6.20?

The EML share price has risen over 15% in the last five sessions, closing Thursday’s session at $5.73 per share.

On Wednesday, EML Payments (ticker: EML) revealed that it had entered into a binding agreement to acquire Sentential Limited – in a deal valued at close to AUD$110 million.

Investors responded positively to this news, with the stock rising firmly once trade resumed on Thursday, finishing out the session up 5.72% to $5.73 per share. That close is just shy of the stock’s 52-week high.

Details of the deal

As part of the offer, EML will acquire 100% of Sentential’s outstanding stock. EML will gain ownership of both Sentential and its subsidiaries, including the firm’s open banking product: Nuapay.

Ultimately, EML said this acquisition will help the company diversify the scope of its payment offerings as well as push more aggressively into the open banking space. To be sure, it’s a space where significant room for growth, with Macquarie saying ‘There is a strong structural growth story with Open Banking.’

EML said the deal would be funded through a combination of cash on hand (~$60.3 million) and the issuance of new EML shares (~$48.2 million).

Open what?

Open banking as a concept remains relatively new, but centrally involves third parties – in this case the likes of Sentential – working with established financial institutions, such as banks, to offer their customers more innovative financial products.

For example, Sentential's core, cloud-native platform is mainly used to help its customers make direct debit transfers, credit transfers and real time payments transfers. Looking at the open banking theme, since 2018 Sentential's platform was expanded to focus on Open Banking, specifically through the company’s Nuapay product, and is currently connected to over 1,750 financial firms in Europe. Worldpay and Cybersource are key customers, for instance.

'This fast growing Open Banking product is integrated within Nuapay's A2A capabilities, which in CY20 processed volumes of approximately 600 million,’ EML noted.

Strong performance of this product has been earmarked as a key part of the acquisition, with EML flagging earnout arrangements of up to $62.1 million, based on Open Banking revenue targets of $41.9 million – for the 12-months ending 31 December.

Macquarie analysts themselves, in examining this deal, placed a particular focus on these earnout arraignments, saying:

‘Our current forecasts only incorporate ~60-65% of the earn-out being achieved, however should the earn-out and modest levels of growth be achieved thereafter there’s an additional ~25-30% of valuation upside to our expectations.’

Despite that cautious view, the investment bank raised their price target on EML to $6.20 from $5.70 in response to the acquisition announcement, while maintaining their Outperform rating.

‘The acquisition gives EML exposure to significant structural growth in UK/EU. The business ex SG has further FY22 upside to be driven by ongoing strength in the GPR division as well as a recovery in multi-currency cards and physical malls.’

Once and if this deal is finalised, EML expects its gross debit transaction volumes (GDV) to stand at approximately $90 billion. With a variety of approvals still required, including regulatory approval from the FCA and ACPR, EML expects the acquisition to be finalised in late fiscal 2021.

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