The EML equity story is simply irreparable While you are new to the company, we must remember that this latest fiasco is hardly an unusual occurrence at EML. Ever since Mr Cregan left the company in 2022, shareholders have endured a cavalcade of mostly self-inflicted disasters: the value-obliterating acquisitions of PFS and Sentenial; the revolving door at the CEO position, going through four different chief executives in a three year period; and even the hugely embarrassing expose of inappropriate expense claims by the former Chairman (which led to his removal).2 Indeed, Mr Hynes’ hiring-then-firing only further underlines EML’s chronic inability to manage its affairs in a manner befitting a listed company. The announcement came mere days before Christmas, delivered into an illiquid market and with nary an explanation - just a month after Mr Hynes had presented an ambitious, multi-year turnaround plan (‘EML 2.0’) as its key architect. While the shares promptly fell 20% (and have barely recovered), the main reaction amongst the investor base was resignation rather than surprise. It is this entrenched, terminal apathy that necessitates a sale of the business. Simply put, your investors have had enough. Most of the register will not sign up for yet another turnaround plan under yet another new CEO (let alone any prospective new investors). And this unfortunate reality is why the stock trades for just 5x EV/EBITDA - amongst the lowest outright valuations for a payments stock in listed developed markets – reflecting near-zero appetite for the ‘return to growth’ story currently being proffered to the market. Rather than persisting in futility as a listed entity, then, management should explore what an auction process could achieve right now for shareholders. A full sale of the business could result in 100% upside for our stock It is my strong contention that our Company could sell for anywhere between $1.5 and $1.7 a share – that is, a 100% premium to current prices – offering a huge windfall, and certainty of value, from current levels. I have compiled a list of every relevant comparable payments industry transaction (that I could find) in the last seven years, spanning many different geographies, sizes, specific verticals, and market environments.3 As outlined in Appendix A, the dataset suggests median transaction multiples of 5.5x LTM EV/Revenues and 17x LTM EV/EBITDA. Meanwhile, our Company today trades at 1.4x EV/Revenues and 5x EV/EBITDA. Even accounting for important business model differences, and EML’s specific heavier reliance on interest revenue than some of these other comps, the disparity in valuation remains gargantuan. Of particular note, the company most similar to EML’s core G&I segment – Blackhawk Network, a pure-play gift and incentives business bought by SilverLake in 2018 – was acquired 2As reported in the Australian Financial Review, see ‘EML Payments chairman’s corporate credit card ignites boardroom clash’, August 15, 2024. https://www.copyright link/companies/financial-services/emlpayments-chairman-s-corporate-credit-card-ignites-boardroom-clash-20240813-p5k1zd 3See Appendix A, ‘Comparable Transaction Analysis’ 2 at 15x EV/EBITDA: that is, more or less triple the multiple our Company garners today in the market. Any way you slice it, there are many, many turns of upside for shareholders in a properly-conducted sale, even if such a process achieved only the lower end of comp multiples on the extant business today. As you know (having sold your own payments business historically), a key reason why transaction multiples in the payments industry screen highly is because many of these businesses offer recurring, high-gross margin revenue streams that can be denuded of central/corporate overheads and thus become much more profitable to the acquirer. At EML, central costs and overheads alone were specifically disclosed to consume $18mm last year – a full 12% of noninterest revenue and 35% of reported EBITDA! – and it is my belief any strategic acquirer could remove most of these costs.4 Naturally, there would be further substantial synergies within the pure opex envelope, as well. This is of special relevance to EML, today, as the Company purports to rebuild its platform for growth. Capitalized synergy value – a number that to my mind could easily top $100mm, or 30c per share alone – is value that management is explicitly choosing to forgo, in order to pursue its risky new business plan, if it chooses not to sell. But in reality it is worse than this. Non-interest revenues have not grown in three years, and yet corporate overheads have exploded, to the tune of $35mm in cost inflation since FY215 – and now, under ‘EML 2.0’, shareholders are being served up even more investment into the business. Why should shareholders underwrite this plan when we could alternatively sell up and get paid a (high) multiple on money already spent? In sum, I believe even a mediocre outcome from a full sales process – now that the legacy PCSIL and Sentenial issues have finally been resolved – could generate something like 8-10x standalone EV/EBITDA, along with at least $50mm of value for capitalized synergies. Against management’s guidance of $60mm EBITDA this year – even assuming no further growth in the business after that – would get us to $1.50-$1.70 per share, or a clean double from current trading levels. In the face of such a large quantum of upside, it is imperative the Board at least present shareholders with the opportunity to consider this prospect – before the Company begins the full implementation of a yet another interminable turnaround. That is why the Company should hire advisors and conduct a strategic alternatives process, as soon as practicable. I would also encourage you to canvas the opinions of other shareholders, both large and small, as I am quite confident you will find my sentiments echoed by all and sundry. 4See Company announcement, ‘EML 2.0 Strategic Plan Investor Presentation and Trading Update’, November 26, 2024, slide deck p. 31, ‘Global Operating Model’, for disclosure of these discrete corporate and central overheads. https://announcements.asx.com.au/asxpdf/20241126/pdf/06bv8k7xcckcbz.pdf 5Reconciled from Company filings. In FY24 underlying business opex, corporate overheads; and central costs amounted to $112mm; in FY21 this number was $77mm. 3 I remain at your disposal to discuss all the contents herein. Very sincerely yours, Jeremy Raper
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