EML Payments – fundamental value (w/ event kicker)

I have been working on this idea for the past few weeks and this will be a much longer article than usual. This one is going in the Fundamental Value bucket (though as usual there is an event/special-sits angle to it to catalyze value). I should also mention, this is a fairly complex business in terms of its reporting (lots of different segments with various jargon attached; lots of add-backs/exceptionals in the accounts); and its recent history. I have done my best to simplify and focus high-level as much as possible (please feel free to ask specific, detail-oriented questions in the comments and I will follow up).

EML Payments (Australia: EML) – last price 42.5c – $1-2mm ADV, $157mm market cap

Thesis summary: EML Payments (EML), an Australian fintech company, trading down 94% from all-time highs and at five-year lows, has been totally and utterly puked by the market. A never-ending regulatory snafu with its main European regulator over the past two years has completely eroded the company’s credibility; and ultimately has led to the destruction of the consolidated PnL, as endless cost escalation in pursuit of regulatory approval has consumed what previously was a highly cash-generative, capital-light set of payments businesses. The company has gone through one CEO; reconstituted the board twice; been sued by its shareholders; and burnt over $500mm of shareholder capital by doing poor acquisitions. At 42c and about a $155mm EV, the market is pricing this business for going concern risk.

I believe the market is wildly, wildly wrong. Whilst the mistakes of the past are very real, the market is yet to realize the new reality, today, at the company is quite different than where we were just a few months ago. The entire board has been reconstituted, and is now effectively led by an engaged, small-cap activist specialist (Alta Fox) who is not only on the Board but owns an 8.5% stake in the company with a cost basis near 50% higher than current levels. This new board, in position for barely a month, has already put the core problem asset, PFS, up for sale and it is my contention that it will either be sold or otherwise excised from the company in short order (under six months). The market has also somehow forgotten that EML as a whole was the subject of at least two reverse inquiry take-out attempts, just 12 months ago, when the situation was not so different than today, at prices 2.5-3x higher than current levels.

Once or if that happens, what is left is actually mostly a high quality business, the majority (>80% of EBITDA) of which is a Gift and Incentive business where comparative multiples are generally well north of 10x EV/EBITDA. Furthermore the market totally misunderstands the power of the new interest rate environment to transform the PnL. I can chop up the pieces two or three different ways and even assuming a huge negative value for the problem asset, still get an implied value for the whole thing of >2x the current price. In reality I think post problem asset disposal, all parts of the business will be up for grabs, and it would not surprise me to see a total value of >3-4x the current price realized here over the next 12 months. I believe the narrative will rapidly shift from ‘this business will be shut down by the regulators’ to ‘this business can be sold in pieces for $1.5 a share’, as and when we receive final resolution on the PFS business – something that should be 2023 business. In sum I believe we are at the moment of peak pessimism and almost any kind of incrementally less bad news regarding the problem asset could see the stock up >50% (this is just levels we were at a month ago, after all).

Business background

Normally in writeups like this I like to keep the exposition of the company’s history to a minimum, or at least self-contained discussion. This time, however, we need to go a little into the weeds and thus the ‘history lesson’ will be longer than usual. I think in this case it is especially important to appreciate the extent of management missteps that have occurred in recent years, contributing to the total washout in the stock, and hence our opportunity today. This is because the core of my argument, and what I believe will happen, is simply the disastrous acquisitions of the last couple years will be unwound and we will be left more or less with what existed back in mid-2019.

Back in 2019 – meaning FY19, ie the June fiscal year end – EML was a relatively simple, growing financial services business, based around two key verticals: the General Purpose Reloadable (GPR) business, and the Gift & Incentive (G&I) business. Both of these businesses were growing at strong organic rates of 40-50%, though EML had always been acquisitive and thus had rolled up other businesses into these two core offerings:

As you can see in the above, what I will heretofore call ‘core EML’ – that is, EML before the problematic acquisitions of PFS and Sentenial – did about $100mm in revenues and $30mm in EBITDA in FY19; was still growing at strong rates, organically; and crucially, had no trouble turning adjusted EBITDA into cash flow:

We should examine exactly why this core franchise was, and is, such a high-quality business. Let’s start with G&I. EML’s G&I segment provides single load gift cards for shopping centers and incentive programs around the world. They manage services at over 900 shopping malls globally (by far the most important industry exposure for the group), providing a complete service from issuance, payment processing, reconciliation, and monitoring/fraud. G&I earns fees at multiple levels throughout the issuance and transaction process, including:

  • establishment fees (when EML issues the card, either digitally or physically):
  • either transaction-based fees (and/or interchange revenues), when a customer uses the card; or alternately a subscription based fee;
  • breakage (when the card expires and there is unused stored value left on the card);
  • and interest income on the float (the value loaded onto the card held as cash by EML or its partners until it is spent).

Gift and incentive card businesses are, in general, excellent businesses, with high gross margins and minimal underlying capex requirements. This is because breakage runs structurally 2-4% and represents almost pure margin to the program operators; but also because once established and won, client business is generally sticky (it is hard to re-establish extant programs with new providers given the size and complexity of customer information and sharing). Moreover maintenance costs (for established programs) are quite low, leading to high cash on cash returns; and there are generally large cost synergies to acquisitions in the space given the ability to plug multiple new programs onto an existing platform. This is why established players like EML then tend to grow through acquisition; and further explains the historical high acquisition multiples in the space (as we shall discuss).

You can readily see this attractive earnings profile in the segment PnL. In FY2019, G&I grew GDV – that is, the amount of money spent on its loaded gift and incentive cards – over 40%, taking 630bps of revenue from this GDV; and reported near-80% gross margins:

In FY19, G&I contributed >70% of the company gross profit pool and I believe more like 80-85% of the EBITDA pool (given the incipient higher margins, etc). That is to say, in mid-2019, before COVID and the unmitigated disaster of the PFS acquisition, the market was valuing EML basically as a gift and incentive business and had decided that is was worth $700-900m, or >25x a rapidly growing EBITDA:

This is simply to provide context on previous valuation perspectives and the perceived quality of the core business historically – I am not suggesting this was the ‘right’ number or what G&I is truly worth, but suffice to say if stripped of all the baggage and history it would be worth far, far more than the EV of all of EML today (about $155mm), probably close to triple when adjusting for the new interest rate environment. But we will come to the valuation discussion later.

Skipping ahead to the most recent period FY period, FY22, and having recovered from the COVID-induced slowdown, G&I is still reporting a similar gross margin and more or less a similar take-rate (note, it is crucial to compare fiscal year to fiscal year end given the huge seasonality in the gifting business around the Christmas holiday period):

Keep in mind, this extant gross profit level has been achieved in recent years largely absent any assistance from interest rate income (as we shall discuss shortly); and whilst the overall profit pool has not grown massively the last couple of years, this was most entirely a function of rolling COVID effects (first total lockdown; then Omicron around the year-end crucial period in 2021-22). It is important to realize that the business is more or less the same core as pre-COVID, in 2019, just with a massive interest rate kicker and not having grown for a couple of years.

Complementing G&I in many ways is the General Purpose Reloadable (GPR) segment, an analogous business that expands upon the use case of single load gift or incentive cards to offer businesses and consumers a more versatile range of services. As the name implies, ‘General Purpose Reloadable’ refers to any card (again, physical or digital/virtual) that can be reloaded multiple times with cash and has no set expiry date; as with gift cards it is simply a prepaid card (ie no credit is provided). As with the G&I segment, EML offers an end-to-end solution, offering issuance, processing, and program management to a wide variety of industries – but with two core offerings (pre-PFS) in Salary Packaging and Gaming.

Both of these verticals demonstrate the use case for GPR to a wide range of industries. Salary Packaging allows employers to deliver wages directly to to their employees in a digital/wallet form, allowing for faster disbursement; easier and fully verified electronic access to funds; and the subsequent offering of incentives/rewards/inducements from third-party merchants. There is a good video summarizing the offering here, which I found helpful in understanding the offering. Invariably employers sign multi-year management contracts, allowing EML to enjoy a growing stream of largely recurring revenues based upon salary disbursement and usage from a growing employee base over time.

Salary Packaging has grown like a weed, and EML now runs many large programs for employers in various industries globally (having started from small scale in Australia); the broad measure of the success of the program is in the growth of its Active Member Benefit accounts (that is, the number of discrete users access Salary Packaging through EML’s platform and services, worldwide) – this number was 112k on launch in 2017, but had grown to 170k by 2019; and as of FY22 is 330k and counting:

Salary Packaging was a big chunk of the GPR business back in FY19, at about 30% of Gross Debit Volume. Whilst its importance to the group has been diluted since the PFS acquisition, it is crucial to understand that this vertical existed, and exists, totally independent of PFS and would thus form part of core EML, if or when PFS is jettisoned to a third party.

Gaming is another important legacy vertical for the GPR segment; you can see a similar video description of some of the functionality EML offers here. The reloadable card model for funding gambling is a well-worn and profitable business: despite the legalization of online gaming in many parts of the US in recent years, traditional financial institutions still are hit or miss when it comes to direct interaction with gaming and gambling firms. EML allows traditional debt and credit card holders to load value onto their GPRs, which in turn can be deposited into gaming accounts, seamlessly and with minimal friction. Whilst this sounds like a vertical that would be in decline as regulatory reform removes the barriers between traditional payments, banking, and gaming, in fact EML’s gaming GDV has progressively grown and shows no sign of slowing down. In FY19 gaming-related GDV was $0.7bn, driven most entirely by strong growth in the mature Australian market:

Since then, with the acquisition of PFS, the Gaming vertical has diminished in importance as a part of the broader group, and the company has only provided qualitative comments on its ongoing performance – but did mention that in both FY21 and FY22 gaming was still growing organically, suggesting no underlying issues with demand for the product.

Turning now to the economic model in GPR, we can see that it is not dissimilar from the G&I business, with the crucial exception that there is no breakage, and instead EML would earn an extra level of fees from card loads/reloads (‘load fees’); as well as account management fees (particularly in the Salary Packaging product). The below slide summarizes the various revenue streams available to EML; I have made some annotations to clarify the differences between GPR and G&I:

To simplify, headline take-rates – recall, the % of GDV that turns into revenue for EML – is a step function lower in GPR than in G&I; but to make up for this GDV is structurally higher (since cards can be reloaded, and there is a wider market use case for GPR than for simple one-off gift cards). Translating this to the PnL we see lower gross margins in GPR on a larger revenue/GDV base and, frankly, far more rapid organic growth (due to the structural tailwinds for digitization of all payments and the implications for a model such as this). In FY19, GPR did ~80bps of revenue conversion and 66% gross margins; in 1H’23, the most recent period, revenue conversion was better (110bps) but margins were sub 60% due to mix shift and higher costs in the business:

We will address some of the reasons behind the gross margin deterioration at GPR, over time, but for now let’s remember that fundamentally – and despite all that this segment has been through, in particular, in the last three years – this is a low-COGS, high-margin product with attractive economics when managed correctly.

PFS: addressing the elephant in the room

I have mentioned Prepaid Financial Services (PFS) in passing on numerous occasions so far, but it is time to get to the bottom of all the trouble with this company, and that is the acquisition of PFS in early 2020. As I have tried to highlight, before PFS, EML was a suite of attractive businesses, enjoying rapid underlying growth, and valued richly by the market. Perhaps seduced by ‘easy’ past small bolt-on acquisitions, EML management signed an agreement in late 2019 to purchase PFS, a diversified, European-focused FinTech that offered everything from prepaid cards (a very similar product to EML’s GPR offerings) to white-label banking as a service and e-money wallets. EML described the acquisition thus upon announcement; I have underlined (with hindisght-enabled irony) EML’s own assessment of one of PFS’ core ‘strengths’:

The world was different back in 2019: PFS was growing very rapidly (GDV had compounded at near 50% over the last 5 years); opened up Europe as essentially a new market for EML; and provided banking-as-a-service as a core new vertical to attack. As a result the price, as originally negotiated, was extremely expensive, at around 17.5x EV/EBITDA and a total upfront consideration of $450mm with earn outs possible of another $100mm or so:

Keep in mind that at the time EML’s own stock was trading closer to 30x EV/EBITDA and thus management could claim, rightly, that this deal was ‘accretive’ even though funded most entirely with equity.

Then COVID happened, and the price got renegotiated, but management still ended up closing the deal for an upfront consideration of $265mm and a reduced earn-out of up to $76mm:

In retrospect, in some ways it easy to figure out what went wrong. PFS basically tripled the size of the GPR business, as monthly GDV went up 3x overnight:

More than pure volume though was the added operational complexity of operating significant and regulatory-heavy businesses in multiple new geographies. That this happened during COVID, no less, of course made the integration or oversight task near-impossible given closed borders. Worst of all, when EML acquired PFS, (or at least when they agreed to do so) the UK was still part of the EU, and PFS was regulated by the FCA (the UK regulator and one with which legacy EML already had a relationship). But once Brexit occurred, PFS had to find a new intra-European regulator for its (mostly) European business, and it chose Ireland.

Thus its core regulatory relationship became with the Irish financial regulatory body, the Central Bank of Ireland (CBI). Compounding these issues, EML fell into the trap of acquiring another significant business (Sentenial), for >150mm EUR, once again in a largely new vertical (Open Banking), all whilst in the middle of trying to integrate the PFS business.

The first shot across the bow came in May, 2021 – just a handful of months after the operating license at PFS got shifted from the FCA to the CBI, thus implying the regulatory had found immediate and significant problems. The CBI issued a letter to EML, essentially saying, in vague terms, that the general compliance and anti-money laundering (AML) apparatus at PFS was insufficient and would need to be rectified through a significant program of investment (more senior compliance hires; more risk managers; more oversight; better AML and KYC checks, etc) in order for the regulator to allow the business to continue to grow. EML equity fell off a cliff, from the mid $5s to the mid $3s, although management made all the right public statements, promising to shape up and meet the regulators’ expectations.

But then in late July the company disclosed they needed to inject $29mm into legacy PFS card programs that had been (illegally) drawn down, in error or otherwise, under previous management:

Whilst management pinned the blame on the vendors, this was a hugely embarrassing oversight and failure of basic due diligence – something that perhaps would have demonstrated, ex ante, that PFS was a ‘bad actor’ and probably shouldn’t have been acquired. The market’s skepticism only grew.

The CBI came back in late 2021 – this time with a missive to limit growth in the business given the underlying concerns had not been satisfactorily resolved. Despite all this the company was claiming the remediation plan remained ‘on track’; this ‘on track’ language was repeated in a subsequent update (November 2021) that functionally put limits on PFS’ growth for at least 12 months but did not impose broader risk controls or business closure mandates. A class action lawsuit was also filed at this time, for which the company provisioned over $10mm in potential costs.

Despite management’s protestations to the contrary the market had begun to sour on all things high-growth tech, especially so in the face of regulatory scrutiny. EML stock was closer to $3 by the end of 2021, though not much impact had yet shown up in the actual PnL. This changed, rather abruptly, with the 1H’22 report, where, despite reporting ongoing strong growth in KPIs (GDV growth, etc), margins started to suffer, as high-margin setup fees – generated on new account openings and new program launches – fell off due to the regulatory growth limits – and crucially Opex started to ramp aggressively (even stripping out the one-time costs associated with the CBI matter and the class action):

Opex spiraling out of control would now become the dominant theme of EML’s ongoing interaction with the CBI. In each subsequent quarterly update or semi-annual report, opex guidance would be hiked again and again. By 1H’23 – the latest period – the opex footprint for 6 months alone has expanded to a gargantuan $66mm, an annualized $133mm – a cool 3x higher than the FY19 level of $45m, most entirely related to restaffing the organization to meet the endless, insatiable demands of the CBI:

Some of the cost escalation line items have been truly absurd. In 1H’23 the company expensed an incremental $2mm on travel, and $4mm on professional fees – that is, over and above the large numbers they were already paying last year. Note also that these are ‘adjusted’ numbers, stripping out a total of >$30mm in ‘one-off’ total CBI-related costs that have been expensed to date.

Through this dramatic and unprecedented level of cost escalation prior management insisted the remediation program was ‘on track’; and even after the legacy CEO, Tom Cregan, was ousted in a board reshuffle mid last year, the new CEO, Emma Shand, continue to claim to the market that everything was being sorted out on the regulatory front. The truly shambolic nature of these claims was immediately made clear when, in mid-2022, Sentenial – the other acquired asset in 2020 – had its own fraud incident; and then the FCA opened its own investigation into the propriety of EML’s risk management and compliance functions, in late 2022.

By late 2022 the stock was in virtual freefall, plumbing levels in the low $0.60s – 90% off the highs – and the company had basically descended to the level of farce. A shambolic AGM necessitated some kind of board renewal, and this came in early 2023, when three board members (including the Chairman) were shown the door, to be replaced by the company’s second-largest shareholder, Alta Fox Capital, a small-cap activist; and a couple of other high-pedigree new faces (including the former CFO of Afterpay).

The prospect of board renewal and a stop to the bleeding seemed imminent – and yet still the equity found a new low, breaking to the current level (around 40c) when the CBI landed a final, massive uppercut of an announcement by determining that EML’s remediation program was STILL insufficient and that further regulatory action may be needed.

This basically brings us up to speed with where we stand now, so let’s examine the status quo as I interpret it today.

Status Quo: we are at rock bottom

At this stage EML equity is down close to 95% from the highs and is trading at levels that imply significant going concern risk or some unavoidable large negative value for PFS. There is whale excrement on the bottom of the ocean floor, so they say – and then under all that is current sentiment regarding EML’s stock. Basically all sell-side and buy-side investors have given up on the story, such has been the cacophony of bad news and endless disappointment from the company for most of the past two years.

Of course I do not base my investment approach solely on ‘dumpster diving’, but in this particular case I believe the market is missing a number of crucial points:

  • there is no going concern risk here at all;
  • there is a disclosed activist who has pushed his chips in and gone on the board, and is thus ‘pot committed’;
  • there is a disclosed strategic process, that the market is completely ignoring;
  • the latest CBI judgement makes any kind of resolution to the PFS issue a near-term, necessary deliverable;
  • and there have been multiple disclosed interested parties looking to acquire the business at levels 3-4x current prices.

Let’s examine some of the points in broader detail. Firstly, with regard the supposed going concern risk, normally when equities trade off 95% and at 5 year lows there is some implicit hole in the balance sheet or otherwise some strong suggestion of going concern risk. I do not believe anything close to this situation exists today at EML. The parent balance sheet holds >$70mm cash; has access to near $100mm in immediate additional liquidity; does not take customer credit risk; is only very modestly net levered (under $10mm); and absent PFS the core GPR and G&I businesses are hugely cash generative (as discussed earlier). Indeed it is my contention that, somehow, should the business need capital quickly they could put the G&I segment up for sale and immediately fetch a price multiples of the current market cap, in cash.

Secondly, this is not ‘deep value turnaround story with no catalyst’ type of trade. The market seems to have missed the very salient fact that not only has Alta Fox gotten involved, but that Connor Haley (Alta Fox’s principal) has taken the decision to go on the board, and thus has become ‘pot committed.’ Reputationally it would be extremely difficult for him to leave without finishing the job, and given the ‘playbook’ in small-cap situations like this, I think it is not an exaggeration to say he has risked a lot by undertaking this project, in a new geography and in a very prospective market for small-cap activism (that is, small-cap Australia, something I have commented on previously). It goes without saying that I have immense respect for Connor as an investor, and would not be invested here specifically if he were not on the Board and thus largely calling the shots. This is not to say the investment wouldn’t work without him, but having a like-minded investor essentially deciding what to do with the business and the pieces as they come up for sale (or otherwise), with a higher cost basis and a ton of latent and obvious value, is hugely attractive.

Thirdly, the market appears to have completely missed the import of the latest CBI letter: namely, that it has prompted the company to run a formal strategic process for the PFS business and has already hired investment banks:

Normally when stocks down 95% announce they are potentially getting out of their millstone of a problem business, the stock goes up 20%; in this case the stock fell another 30%. I simply think this reaction, near-term as it is, reflects peak peak pessimism and misses the forest for the trees. One way or another the PFS problem will be solved, and soon – the question is really only how and on what terms it gets done. But my contention is any kind of resolution – even one that consumes some cash – would see the equity trade up aggressively. Frankly I thought the equity would trade to 75-80c on this announcement, not fall to 40c.

Fourthly, and building on the point above, is the clear impact of the CBI’s latest missive demonstrates (to me) at least that there is no longer any pathway for PFS to remain within the broader EML umbrella – or at least, not as a public company with the legacy compliance/oversight structure. Having tried – and failed – to remediate this business for almost two years, I firmly believe this is now the CBI telling EML they need to sell up, get out, or sell the whole business to a better owner in the good graces of the regulators. Again, somehow the market took this as an unadulterated negative when in fact it seems to me this is quite a positive as it promotes a near-term resolution to the situation above all else – and just as the new board has been constituted and thus has political cover to execute a sale, either of PFS or the whole company, at much lower prices than 12 months ago.

Fifthly and finally, there have been a number of public reports regarding interested buyers for EML (or its pieces) in the Australian Financial Review (the business paper of record in Australia) in the past twelve months, at levels significantly higher than where we trade today. A number of these approaches have been confirmed by the company (see here and here), although it was not made clear why these entreaties were rejected. Note that the last inquiry, in July last year, specifically mentioned ‘multiple parties’ (the newspaper article mentioned Canadian payments giant Nuvei Corp); and whilst the business has certainly deteriorated somewhat since then, overwhelmingly the issues here are below the line (on costs) and regulatory compliance. Is is so unbelievable to think that a strategic acquirer, already well regulated and at scale in Europe, could look at the cost creep at this Aussie small cap and simply deracinate the cost structure; leave behind most if not all of the regulatory history (by porting the business over to its own compliance and risk management functionality, perhaps with a different regulator and on a different license); and thus extract the white meat of the core businesses left behind? And if said acquirer comes calling with the stock now another 60% below levels it was when those bids were last reported ($1.2 or so), why would the activist-controlled board knock them back? After all their cost basis is around 55-60c.

Putting it all together, then, it appears we have a potential inflection point, if not in the actual business (that comes later) then I believe in how the market will start to respond to new information from here. I expect the discussion on the name – such as it is – to shift from regulatory issues 110% of the time to break-up value and what PFS could be disposed for. Thereafter I expect the street to gravitate towards a reappraisal of core EML or at least begin to capitalize the G&I business at something approaching a more realistic acquirer’s multiple – but we clearly don’t need any of that to win from current levels.

It is often said you make the most money when situations go from being ‘absolutely and utterly hopeless’ to simply ‘pretty bad.’ It is my contention that EML today is a quintessential investment in this mold. We simply need PFS to be cauterized, in one way or another, to make an outstanding return; anything else beyond this will simply be gravy and obviously multibagger territory.. Let me explain why – firstly by considering the impact of the current interest rate environment on the business; and then by conducting a simplified Sum-of-the-Parts analysis.

The new interest rate environment: massive (yet misunderstood) tailwind

Looking simply at what pre-PFS EML earned back in FY19 and assuming that, plus some growth, is the upside case here would be a profound mistake. Due to the nature of its business model, EML is able to earn interest on cash held in custody to back value loaded onto customer cards, as and until the customer redeems the value of said loaded cash (this is called ‘float’). This is why EML breaks out the parent balance sheet from the consolidated balance sheet in its presentations, to demonstrate the size of the float as the overall installed base of cards grows. You can see that, as of the most-recent balance sheet date (Dec’22), the float was about $2.6bn AUD on-balance sheet:

In reality, the actual float is a bit bigger than this, since EML only includes self-issued amounts on-balance sheet – meaning there is additional float generated by its partner banking institutions in jurisdictions where it doesn’t have a banking license (mostly the US). EML does not earn the entire carry on these additional amounts (about $300mm AUD or so), but still participates in some carry on this additional sliver (as they share it with their banking partners). The ‘total stored value’ metric is thus important and most entirely an interest-earning revenue stream; as of Dec’22 this amounted to almost $2.9bn AUD. You can see, incidentally, how it has continued to grow, and grow, despite the many idiosyncratic issues EML has faced in recent years:

Any interest earned on this float runs directly through the revenue line at 100% margin, and is thus pure incremental profit; as such EML is highly sensitive, in theory, to changes in short-term interest rates. The company gives some sensitivity as to how impactful movements in interest rates is, per the following slide in their latest deck:

As you can see, EML is currently (well, as of early January) run-rating close to $30mm in annual interest income, or something like a 1.1% net interest yield (using $2.6bn of assumed float and thus implying the partner-generated balances don’t earn much). This still strikes me as incredibly low, and I think will march much higher, sequentially, for a number of reasons:

  • the majority of EML’s float is denominated in EUR (39%) and GBP (33%) balances, where interest rate rises have been commensurately slower than in the US, but are now catching up (see Euribor 6 month rates here, and GBP SONIA overnight rates here). Both EUR and GBP deposits at call should be earning 3-4%+ on a run-rate basis;
  • the CBI investigation has stifled EML’s full ability to earn current call or money market-equivalent rates, as banking partners have simply refused to allow them to reinvest in more positive-carry yielding instruments with Irish-domiciled balances (ie the bulk of the European business and thus float) whilst the investigation is ongoing (but obviously this will change as soon as the regulatory impasse is resolved);
  • there is a natural delayed flow-through from live market rates to the PnL, given contract and pass-through lag.

Nevertheless, this tailwind is being totally overlooked by the market and its impact on the go-forward earnings power of the business is completely ignored. Back in 2019, when core EML was doing $30mm in adjusted EBITDA and the problematic PFS acquisition had not even been contemplated, the company was earning 30-50bps on their float:

This subsequently dropped to near-zero during COVID and remained there, for most of 2021 and into 2022, due to central bank actions during the pandemic. But today the situation is wildly different: even a much-lower-than-market terminal carry of say 2.5%, on today’s float of $2.6bn (again assuming no further growth), would imply $65mm drops to the EBITDA line, or an incremental $35mm or so even versus what the company says they were run-rating at early this year. Clearly this would double (currently) guided EBITDA and completely change the investment calculus, and while this not made its way through the PnL yet, given some of the factors discussed above, it is realistic to believe it will make its way there in the near term given a likely resolution at PFS and the natural progression of contractual lag through the business.

And crucially, even if we were to perform radical surgery on this business, cutting out PFS and thus assuming a bulk of the float disappears if PFS is sold to a third party, the look-through impact of higher rates for longer on residual EML is still transformative. Disaggregating core EML float from the PFS contribution is a little bit tricky, as the company does not disclose where the float sits on this basis. But PFS sits entirely within the GPR segment, and comprises most all the European assets of the group, so we can take a stab at isolating non-PFS float for the purpose of this analysis.

The FY22 Annual Report discloses that G&I contributed 25% and 38% of interest income in FY21 and FY22, respectively:

Given the native currency interest rates were likely higher in G&I (ie, predominantly non-EUR) than in the GPR float, these metrics likely overstate G&I’s share of total company float (note, for example, that G&I’s share of GDV is only 10-15% of GPR’s contribution in the above). Let’s assume therefore that G&I’s share of float is just 22% of the total consolidated float.

We should also note that core EML includes the Australian business within GPR – a high-quality segment that existed well before PFS and that would remain within EML if or when PFS is excised (this segment contains most all the Salary Packaging business; the Gaming vertical or at least a good chunk of it; and a few other juicy local government contracts). The Annual Report discloses that on a revenue basis – not a perfect proxy for share of float, but something to work with – Australia contributed about 15% the last two fiscal years:

Thus, if Australia is perhaps 10% of float – within GPR but totally outside of PFS – and if the separate G&I segment is 22% of float, we can tentatively conclude that non-PFS (that is core EML) float, is around $925mm today – most all of which should be full-interest earning. As per the below, just a 2.5% carry on this slimmed-down, post-PFS assumed float would generate $23mm in interest income, or an incremental $20mm over what pre-PFS EML was earning through interest alone, in FY19:

The assumptions above are intended to be more illustrative and directionally correct than accurate to the dollar, but they should demonstrate an important conclusion: even if PFS were to be fully and utterly thrown out, core EML would still be earning close to double, at the EBITDA line, what it was earning in FY19, simply through the accretion of higher interest rates alone (ceteris paribus for costs, of course). Absent any other changes or value generation, that would put core EML at about 3x EV/EBITDA, today ($160mm EV today versus $50mm in FY19 interest-rate adjusted EBITDA). That seems ludicrous for a business of this quality.

Taking a stab at a pro-forma SoTP

Since I have a rather strong view that PFS will be disposed of in some form, I am going to continue to think through what residual/core EML could be worth post this exercise; and then modify that number for various scenarios concerning the PFS business. To refresh, this perspective in grounded in the view that the CBI has effectively demanded some kind of change of control transaction for PFS, and that the activists now running the show at EML recognize this is the quickest and best way to cauterize the wound at this point.

In the below SoTP, I have (as usual) made a number of simplifying assumptions, none of which should be considered aggressive:

  • What I consider core EML – that is, the non-PFS part of GPR, and all of G&I – is assumed to earn basically FY19 gross margins on LTM revenues (ie no credit for further organic growth);
  • credit for run-rate incremental interest income per the earlier analysis;
  • $10mm in core opex inflation (ie 12% of total opex inflation ($88mm) incurred since FY19 stays with the core EML business despite essentially all of excess opex inflation accruing at PFS and more recently Sentenial);
  • Sentenial gets sold for half of what EML paid for it ie $86mm, despite substantial growth in the interim and reaching positive EBITDA;
  • No credit for rest of legacy Digital Payments segment ($8mm of Gross Profit in FY22);
  • legacy PFS vendor debt is honored in full and remains at EML, AND treat provisions and residual Sentenial earn-out as debt;
  • zero clawback of $27mm injected by EML into PFS cash-deficient legacy card programs (despite ongoing litigation);
  • comp multiple (10x) for G&I and 6x for residual GPR.

You can see the below work-up, both at the rough earnings level, and then the SoTP lower down:

None of these assumptions strike me as aggressive, either individually or in total, and yet we get a valuation basically three times the current quote. Of course the obvious corollary is that the market is pricing in an extremely large negative value for PFS – or, using the $450mm in theoretical ex-PFS value here as a guide, maybe $300mm in negative value (being the difference between the above SoTP and the enterprise value today). No doubt the market would not immediately grant core EML a high single digit multiple, nor would it capitalize a mid-$40s EBITDA number (even though this seems eminently achievable, just taking the business back to what it was, at much lower scale, and adjusting for the rates benefit). But I think it remains indisputable that the market is putting some very large negative value on PFS; and thus any resolution to the status quo – even one that carves off PFS at a low headline dollar price – would be taken positively by the market.

We will come to what PFS should be worth shortly, but firstly a few words on why 10x is the ‘right’ multiple for G&I. I mentioned earlier that these gift businesses are extremely high quality and generally trade for high multiples. If you speak to one of EML’s direct North American competitors, BlackHawk Network, they will tell you directly these businesses tend to trade at 10-12x EV/EBITDA and there is invariably a bid at that level due to the underlying high cash-generation of the model; and the huge cost synergies available upon consolidation to the acquirer. BlackHawk itself was formerly listed on the Nasdaq (in 2013) and after rolling up segments of the North American market was acquired by Silver Lake in a $3.5bn LBO in 2018 at 15.5x LTM EV/EBITDA:

Notably, BlackHawk at the time carried >4x of net leverage; pro-forma for the PFS separation, G&I would be totally unlevered. We should further recognize that with 80% gross margins and – even back in FY19, before interest rates moved – >30% EBITDA margins, the core G&I business at EML appears in many respects a superior asset to the broader BlackHawk group. Whether BlackHawk or someone else, be it strategic or PE, I am quite comfortable G&I is saleable at minimum 10x EV/EBITDA in an auction/breakup scenario. That realization alone essentially underwrites more than a double from here (assuming such a sale would be pursued).

But what is PFS worth?

This brings us, of course, to the thorniest of questions – and that is, what is PFS worth today? The answer is of course, ‘it depends.’ To EML today it is of profoundly negative value; but it should be recalled that this business as recently as 2020 was sold for $330mm (after being price cut due to COVID) and a health mid-teens EV/EBITDA multiple, apparently after a competitive auction process. The business, pre-EML ownership, was growing rapidly; still generated mid-60%s gross margins; and (before the regulatory snafu) was racking up high 20s % EBITDA margins as it grew:

I believe it is a near impossibility to put a precise number on what PFS is worth today, since so much depends here on who the acquirer is; what the new regulatory relationship looks like; and how much of the explosion in costs in the business at EML can be ripped out by the new owner. But perhaps we can speculate as to what a potential acquirer could see in the business.

Let’s approach this from the perspective of Nuvei, a Canadian listed FinTech specifically chosen because they were mentioned in the AFR as an interested potential acquirer of EML (and thus, perhaps, willing to underwrite the PFS risk). It seems to me the core problem facing EML in managing PFS is a lack of scale, particularly in Europe – here, Nuvei appears to check all the boxes. Total payment volume last year was $128bn, or 10x the size of EML’s entire GPR business (within which PFS obviously sits). Nuvei is highly profitable and already at scale, boasting >40% adjusted EBITDA margins and converting 90% of EBITDA to free cash:

Nuvei operates in many if not most all the same verticals as PFS: digital banking, cross-border payments; digital e-money wallets; prepaid cards. Moreover it already has a significant and growing European presence, with 55% of group revenues coming from the region:

Within the rubric of EU regulation, Nuvei appears to have two operating European subsidiaries (at least at the licence-holding level), neither of which sits in Ireland. These are Nuvei B.V. in the Netherlands, and Nuvei Limited, in Cyprus:

Without speaking to the strength or weaknesses of Nuvei’s regulatory engagement, the simple fact remains here is a payments business handling 10x the volume of EML; growing extremely strongly, both through acquisition and organically; and regulated, within Europe, outside of Ireland. Moreover it is a cashed-up, highly valued listed company (>25x EV/EBITDA) with zero leverage that has (apparently) already engaged with EML in recent months on a potential change of control transaction. Is it so beyond the realm of possibility that Nuvei could buy PFS; port over the licenses to its Holland/Cyprus entities; cut a whole bunch of costs that EML stuffed onto the business in their error; and make an absolute fortune?

On the contrary, it seems this is exactly what they would do. What, though, would they pay for such a privilege? At current valuations on the EML equity it doesn’t really matter, as long as PFS is sold for some net non-negative number (and in reality I think Nuvei would probably be more interested in acquiring the whole company, including G&I, than just PFS alone). Still, for the sake of argument, if Nuvei could cut PFS-related opex by 33% – that is, from say $70mm to $47mm; and grab the additional benefit from restriking PFS’ $1.9bn in float closer to market rates, I think acquirer’s EBITDA on PFS alone would be something like $62mm:

To be fair, some of these synergies (at the COGS line through better vendor terms; and at the opex line of course due to duplication of systems, etc) are available only to a strategic acquirer like a Nuvei. And we should also probably assume some budgeted cost for integration, or firing all the unnecessary hires that EML installed. Finally, perhaps there is some meaningful cost to reincorporate the issuing entities now sitting in Ireland into new geographies (or a costly relicensing process). But the fact remains – PFS is clearly worth something, potentially a very meaningful something, to certain acquirers. The number above are hardly aggressive and yet $62mm EBITDA would increase Nuvei’s total EBITDA by 20%. Nuvei has a $8bn CAD market capitalization today, supported by $350mm of adjusted EBITDA; surely they would pay a few percent of this market cap to grow EBITDA another 20% minimum at a stroke?

It is hardly my intention to get too bullish with regard to PFS outcomes, but I simply want to re-underline that 1) PFS is not worth zero, let alone a large negative number; and 2) there are certain outcomes here (a $200mm or $300mm sale) that could see our EML equity literally 3x overnight. In reality, I doubt Nuvei would bid against themselves and there will certainly be some deep discount for regulatory uncertainty. But even so, simply putting a line under PFS and getting something modest like $100-150mm in cash would, I believe, send the stock straight to $1.5-2 a share. With no balance sheet risk (in my view), those are the kinds of odds I can really get behind.

Some brief thoughts on Sentenial (Digital Payments)

I have spoken very little about the third of EML’s segments, that is Digital Payments – the business unit that encompasses the acquired Sentenial/NuaPay open banking business as well as the legacy VANS business. The business did $15mm in gross profits last year, having grown revenues at near 100% (and at 85% gross margins) as the NuaPay open banking business scales rapidly (and reached EBITDA breakeven). EML paid close to $175mm in total (cash upfront plus earnouts) for the bulk of this business in mid-2021, and despite the ongoing rapid growth and apparent move towards profitability, it took a large charge against goodwill for the acquired business last year due to declining tech valuations and EML’s own tanking stock price. I will not pretend to be deep in the weeds on NuaPay’s specific edge as an open banking platform; nor do I have deep multi-year DCF demonstrating this segment will be worth many multiples of what EML paid, in the future. That is because I do not believe this segment will drive equity returns here (good or bad) and frankly is maybe the fourth or fifth thing to think about, in terms of priority, when it comes to this investment.

Thus, for valuation purposes, I am simply taking a pretty chunky haircut against what EML paid in an open-market, competitive transaction – admittedly a totally different market environment. It is my understanding that given the nature of the business, and its recent acquisition, it would not be too difficult to carve it out and sell it independently, should the new board decide that is the best path forward. If you are worried $86mm is too aggressive a marker here, you could always cut it another 50% or so – it doesn’t change the valuation argument, as SoTP drops only 10c as a result (and recall I am giving no benefit for the legacy VANS business which still contributes >50% of segment gross profit):

So all in all I am clearly imprecise on my valuation of this segment but feel quite comfortable at an $85mm or so number give or take, for now.

Risks: what should we be concerned about?

When the valuation and set-up is this bombed out, it is perhaps natural to wonder what more could it take to really get hurt. This is a bit of a different case in that, whilst the break-up/asset value appears many multiples higher than where we trade and thus covers our purchase price many times over, there is of course still risk regarding the actual execution and disposition of some of the assets. Perhaps the worst outcome from here would be a failed sales process for PFS – that is, simply no one wants to inherit the regulatory headache that would potentially come with the business. Whilst I don’t think this happens, as per our discussion above, if it did, I believe EML would be forced to essentially put PFS into run-off: something that sounds scary but frankly would, in theory, generate cash in the interim given the huge size of the float and interest rate earning power; the ability to run-down staffing levels, consulting spend; all the extra layers of organization building that are currently being expensed in the pursuit of a sustained growth business; and of course by cutting any and all growth and new-program related spend. Indeed it is quite remarkable that even with the regulator throttling PFS so massively over the last year in particular, the business has continued to grow. But if it could not be sold, and the regulator could otherwise not be appeased, putting it in runoff does not strike me as a horrible middle-ground and maybe not something that would ultimately cost cashflow at all (and certainly not the multi-hundred million implied negative value being priced today).

Another risk worth considering is the G&I segment’s sensitivity to broader macro and in particular to consumer spending (65% of the business derives from shopping mall programs, after all). During COVID GDV at the segment did get hit, somewhat, although the fall was cushioned by 1) growth in non-mall volumes; 2) overall volume growth due to client wins and take-up of the product; and 3) higher breakage due to the effects of COVID, effectively pulling forward a bit of revenue that would otherwise have been recognized in future years. In fact, looking at the below, G&I performance during the heart of COVID was quite incredible:

In an elongated and ‘regular’ recession, perhaps, the impact would be more strident: you would see less elevated breakage (ie no tailwind for EML), but simply less GDV as consumers spent less. The business is highly seasonal with a big chunk of GDV/revenue being generated over the holiday period, so if the global economy goes into the tank in the second half of this year, that is a real risk, and one I am cognizant of. At this point I simply feel the valuation more than compensates for the risk and the interest rate tailwind is such that it would offset a huge drop in GDV volumes without impacting earnings too much.

A final risk to think about here – and why this position size should be considered carefully – is the ‘black box’ nature of some of the regulatory matters at hand. It has never precisely been spelled out, what exactly EML did wrong. Since the CBI found these issues, the FCA has also chimed in, suggesting EML’s standards are not what they should be. Whilst it has been quite a long period of time now that the regulators have been interacting and examining the company – defraying our risk here considerably – there still remains a non-zero chance that some further regulatory infraction comes to light that risks another portion of the business (the highly profitable Australian GPR business, perhaps). I view these odds as quite low, and believe in any case the problem business will be sold in under six months – but it is worth thinking through.

Still, given all of the above, and with a base case of a 3x upside to vanilla SoTP value, before even considering potential sales proceeds from a PFS disposition, this seems a very fat pitch indeed. I believe if, or more likely when, the PFS is finally sold or otherwise totally derisked, this will near immediately be an 80c stock – and more if there are actual cash proceeds from any disposal transaction. With a new board and activists aligned, gunning for a similar outcome and with a cost basis closer to 60c, this is about as juicy as it potentially gets in small-cap land. This is a top five position in my book.

Disclosure: long EML.AX

141 thoughts on “EML Payments – fundamental value (w/ event kicker)

  1. Thanks Jeremy – really interesting idea! $1-2mm ADV = I can’t wait to see how much this spikes tomorrow because of those who don’t know how to use limit orders.

  2. Hi Jeremy

    Did you confer with Alta Fox in producong this? Wondering their view of the upside.


    Given the r/r here why only top 5?

    • for full disclosure – i did discuss the investment, and their perspective on value, with Alta Fox. obviously i am not privy to any non-public information, nor do i have any clue what they will do with the process (beyond what has been announced publicly). but suffice to say, as outlined here, that our views on 1) fundamental value; and 2) various ways to extract and maximize this value, are mostly aligned.

      as for why ‘only’ top 5 – this is still a pretty hairy, opaque situation, where we do not know, for sure, if there is a willing buyer of PFS (at any price). I THINK That is the case but there is that element of uncertainty, as well as some of the other risks mentioned.

  3. Could everyone please take a moment to appreciate the contrast between the first and last paragraphs of this writeup? Love it 😉

  4. Thanks for the write-up Jeremy. I checked some Twitter history on the name and saw that you were short the name before and also had some “discussions” with Ron on it 😂
    What happened to the buy-back programme they launched last fall? Seems like they never bought any shares. A lot of hair on this one but interesting upside if they can resolve the problems without costing too much.

      • sorry on the buyback – not sure. keep in mind this was under the aegis of the old board, who did many, many things wrong. not sure they should have ever announced the buyback (they clearly didnt execute on any of it). i would expect first and only order of business is getting rid or putting a line under PFS. then and only then can they consider what to do with the rest of the business/capital returns etc. of course by then i expect this would be a $1 stock or something

  5. Looks like Alta Fox disposed of 20% of its position as of latest filing (from 38mm to 30mm shares)? Any concerns?

    Any insights into other largest shareholders’ intentions where this holding is miniscule part of the their book (Sentier, Colonial, Argo)?

  6. Hey Jeremy, thanks for the writeup. You said this is a new top 5 position. Which stock is being replaced by EML.AX in the top 5 now?

    • sorry yes – UNTC, even though I havent sold any shares, I redeployed a bunch of the AUE proceeds into EML and as a result EML is now in the top 5.

  7. In a train wreck built with ‘failed’ acqusitions, more often than not there is a great business in there which helped to acquire other assets. Great write-up!

  8. This is getting tedious. We’re not even open yet and some idiots have pushed it to .48bid. Great for Jeremy who’s already in this, but pretty shite to have this slippage for everyone else … can’t folks not simply put a limit in around where it closed and leave it at that. Getting it bid up on the first day after the recommendation just attracts more attention, momo traders, algos …

    • Man…driving the bid up on a day when they put out this press release…could’ve been a great day to get them on the cheap

      • honestly – this PR is kind of expected. absent my own article, i am not sure the stock would really have been down (maybe, who knows). if you speak to the company they were basically hinting the growth cap would be extended – after all they still arent anywhere close to being compliant right – and frankly this only reinforces the idea that PFS needs to be sold.

        with the prospect of enforced zero growth for another year, i think it only accelerates the narrative that it will be sold in the current strategic review – hence an incremental positive.

      • I looked at the 3 month chart to try and encourage an entry after my .43 limit order went nowhere, but I think I will wait a few days

    • Yeah it’s problematic, including for Jeremy as he can’t sell easily now. Not sure what’s the solution here, except capping the number of subs (which I believe Jeremy already does)

      • have made many comments on this topic before so nothing i can really add. all i would say is the argument is not really different at 52c than 42c given the latency of value here. that being said, i have argued many times – and price has generally demonstrated – that subs are always better off doing their own work and waiting 3-4 trading days anyhow than piling in without doing any independent work.

      • If he takes a sizeable position, promote it to his service thus making it gap up 30%+ and then sell his position, this is likely to attract some very unwanted scrutiny

    • Jeremy – were there any subs recently? Subjectively this feels worse than last year (though I accept that this may also be a thinner volume stock than some others)?

      • there have been 7 new subs this year. all of them replaced churned subs whose cancellations ran off. judging from my intereactions with them, they are not likely the reason this stock reacted the way that it did.

  9. Thanks Jeremy. Is PFS structurally ringfenced from the other divisions? If it is, how could you really get leakage into another division? (You mentioned as a low probability risk)

    • most all the issues sit within an entity called PCSIL (the Irish subsidiary), which comprises the bulk (but not all) of legacy PFS. legally speaking it is ‘ringfenced’, but the risk I was referring to re leakage is more simply EML being seen as an unfit operator for payments businesses of this nature in the eyes of other regulators.

  10. We have generated 6x average volume. Sucked up a week of sellers. So I may be waiting a while to enter, and possibly miss this one.

      • as i have said many, many, many times, i always advise subs to not trade my names for the first 3-4 days after posting; to use that time to do their own research; then re-evaluate. yes there are some missed opportunities but frankly this is a research service, in any case, not a momentum trading service. and invariably these moves cool down, at least partially if not fully, in
        the subsequent week.

  11. The news is ALREADY out that “Raper promoted it to his subscribers”, and the core thesis summary is out too: “the gist of it is the company is oversold, the PFS business will be sold, the rump is actually quite profitable and interest rates rising means they have a decent earn on their float.”
    So if I recap: Jeremy was able to build a multi-million position without budging the market – at 5 year low. Then some subscribers overflow the orderbook with 6 million bids above close PRE-market, ringing alarms to all forum boards, and every Algo and their dog. Scramble to buy indiscriminately 18 million shares, 9x average volume pushing the price immediately to 55 cts versus 42 cts close, up 30%. Pigs in a pigsty. At such contrast with Jeremy’s pondered words.
    Some subscribers look to me total morons with animal spirits and more money than sense, and need education about small cap trading and some basic understanding about money management, risk management, trading, algos, liquidity, etc…how equities market work. And if they value the service, they should stop leaking . Sorry for the rant.

      • as i just posted on the MGI thread. i have no idea why anyone would leak my work when they are paying for it; it is a premium product; presumably they think it is value added/market sensitive; and, as discussed here and endlessly, some of the stocks are smaller caps and thus prone to volatile trading.

        again – i have zero control over how my content is shared once i create it. if anyone has any ideas on how to lock it down such that only subs can get it, please let me know. but i keep coming back to the idea that if you want to share something, you just take a screenshot and send it around. it sucks, trust me, it does, because how does it help my business to have rips like this occur before subs get positioned? as you can see it creates a lot more badwill on occasion than goodwill.

        but again i am at somewhat of a loss as to how to control it or avoid it happening.

      • Yeah it is difficult and annoying, next to leaking which is absurd it could also be that some subs just have too much $ for the ideas.

        One idea could be as sub # are limited make sure you know all subscribers on a personal basis;
        make the entry proces a bit stricter (i.e. conduct 10 min interviews)
        make sure you get to know all existing subscribers (i.e. investment size, purpose of being a sub, etc. etc.)

        This way you can at least make sure everyone is aligned. And with personal connection people will less likely screw you (and thereby us..)

        Just an idea.

      • thank you for the suggestion. given – still – the vast majority of subs are day 1 subs and thus people i have known (more or less) for many years, believe it or not I probably know, in some kind of ‘internet’ way, well over 50% of the subs. to be fair i don’t know their characters intimately (nor could i say i would judge if or who would potentially leak material). frankly however it is impossible, on the basis of personal relationships and my (imperfect) judge of character alone to be able to craft or mould the sub group in this way…

    • I think it’s incorrect to state ” look to me total morons with animal spirits and more money than sense, and need education about small cap trading and some basic understanding about money management, risk management, trading, algos, liquidity, etc…how equities market work”. I’m working under the assumption that the subs are sophisticated investors independently behaving in their own interests. The fact that they have found their way to Jeremy’s service and paid for a subscription implies a relatively high committment to investing. I think if you gave the same info to a large number of successful hedge fund managers, the price behavior would be similar.

      The underlying problem is that we are all trading small cap illiquid names. These types of names would be better handled within a small cap fund in which a single manager represents a large number of investors (subscribers) and can better control the order flow.

      • Lifting any offers at any price, blindly, in heavy volumes, without discipline, not benefitting from the negative CBI Reg News, destroying much of the margin of safety, then leaking the thesis, does not exactly strike me as sophisticated market behavior…. Instead just look at Jeremy’s smooth exec to build up his allocation….that was pro.
        The outcome today is that ELM went (even before the open !) from a textbook maximum pessimism situation to fake hopes of take over, with the Aussie small cap community buzzing and no more weak hands.
        I am disappointed that after such a great complex thesis made digestible by Jeremy, a few amateurish subscribers succeeded in shooting themselves and the others in the foot. Sorry but up 30%, with all the market aware, is not the same risk reward profile.

      • my concern is with the presumed leak. I’m a new subscriber and this already happened with $MGI (unless Jeremy says otherwise, that seemed pretty blatant and shared on Seeking Alpha under a paywalled service). Would be one thing if it’s just subscribers here bidding against one another. Hard to blame anyone for deciding it’s worth paying up. It’s trading/prisoner’s dilemma type stuff after all.

      • Well that’s partially fair. However, the ‘leak’ part is annoying – and that was the reason for my query further up as to we’ve had recent sub additions .. I see now that ‘new’ got dropped as I was writing quickly.

        Anyway, it (subjectively) feels worse than last year, just on the bidding up, but the leaks also lead me to believe that some is not merely bidding against other subs, as we’re all wont to do, but is silly enough to put it into the wider domain.

        Jeremy, time to selectively cull new additions?

      • thanks Christian. i feel the frustration. i think what i am leaning towards doing is one of two things:

        – simply winding down the newsletter (over two years or something) and using that time to build to a launch of my own fund
        – or avoiding small caps entirely and just tweeting about them (for free i guess).

        no decisions have been made, maybe i will keep the status quo too. part of my thinks this is still valuable even w the pop but yes that move on fri was extreme and definitely not helpful to anyone involved

      • Agree that there isn’t a solution to names getting bid up or tanking immediately after a subscription post.

        My additional points are that:
        1) I’m more bothered by stocks tanking because I can’t do anything about a big gap down, whereas I can consciously decide to buy/not buy by a bid up.

        2) There is no solution. People will do what they do. So personally I just decide not to participate in some of the smaller names based on the write-up, because I know there will be a large “spread” between where I can get in/out and where Jeremy can thus completely changing the risk:reward.

        Bottom line is that I have no issue. At the end of the day, I’m choosing to pay the sub.

      • If you do end doing a fund, I would just request please that you keep this subs service.

      • Whilst I agree there’s indeed not much we as subs or Jeremy can do, such behavior should always be called out, this is just incredibly self-defeating for everyone involved.

      • this touches on an important point. for context – Tom and Laurent are both day 1 subscribers and have been following my work for, what, 7 years? more? so i take their views and inputs especially seriously.

        valid points are clearly being made on both sides. Laurent is frustrated because the trading was really crazy on friday – i am really not sure why, i did try to outline my views in a dispassionate manner, there is obviously latent value here but also a fair few risks and importantly nothing of what i really put together is new in the market, absent perhaps the interest rare analysis (but that is not complex).

        on the other hand Tom’s point is well-taken, the way to avoid this issue is to simply commingle funds and manage it as such (ie as a hedge fund). of course that is a totally different requirement on me (and ask, to you as subs) and one I am simply not in a position to commit to right now.

        but if this kind of thing continues to happen, at some point i will wind down the service, and simply launch a fund.

        the alternative ‘solution’ would be simply do no work/analysis/writeups on names with $200mm mkt caps or whatever. but even then, that doesnt solve the issues because for a ton of recent writeups liquidity was even worse and the stocks didnt move much.

        so i am at a bit of a loss as to what to do here.

      • Personally I definitely prefer dealing with the slippage and, as nomadinvestor said, passing on some of the ideas than with you winding down the newsletters.. 😉
        On the other hand, opening a fund and keeping the communication and transparency of the ideas as you do with the newsletter for the fund members would also be very interesting and I would definitely like to participate (if you take investors with tiny portfolios as mine..:D)

      • Good point. Jeremy if you do a fund, from us subscribers (not from general public), please allow the smaller people to subscribe.

      • yes, any fund i launch will allow minimum investments of $100K and higher, as long as it is cost effective for the maintenace/fund admin.

        with all that said – please note i am NOT contemplating launching a fund at this time, if that changes in the future though, i will let you all know.

      • My 2c:

        Jeremy has tremendous unique value-add in small caps, where there is considerably more upside, usually.

        So would be a terrible shame to either focus solely on larger caps or shut the service entirely. A fund is a poor alternative (compliance time and costs etc) though may have some advantages.


        That subs are in a total snit over a SINGLE DAY of trading in this stock beggars a bit of belief. Though similar days have occured, let’s see how the price behaves over the next weeks or months absent any new information here. Other highly-regarded Jeremy names like PBIT and CLMT have traded all over the map post-publication, giving PATIENT subs ample opportunity. to buy at posted prices. Especially in this case where the upside appears substantial and where price is still below that of Alta Fox’s, it should not the end of tbis fine service.

        Having said that…Subs with FOMO should learn to check their fat BUY fingers in check on such days. Like leaking, it serves no one’s purpose much and will only cost everyone money in the end.

    • I couldn’t agree more. I always use limit orders, though it’s just going to be tough avoiding a price spike given the prisoners’ dilemma.

      BUT, leaking Jeremy’s recommendation … why in God’s name would anyone do this? For what benefit?

  12. Thanks on ringfence – so you’re saying more of a reputational risk? Are the compliance teams separate? If so, I don’t think regulators would conflate the two, and you seem to have similar view.

    • PFS obviously had its own compliance team (i guess!) when it was acquired, that has been deemed totally inadequate now, repeatedly. as such i think it is right to look at the control function sitting not just at PCSIL, but at EML, and this explains why there is still this element of risk re regulatory contagion spreading to other parts of the business. as discussed in the writeup, the FCA also had some issues – again, with the PCSIL business, ie ex PFS – meaning over the course of 2years or so none of the other business units have encountered this issue, yet. but it remains a risk in my mind.

  13. Jeremy, thanks a ton for the detailed and insightful writeup.

    Could you please kindly share your current top 5 picks, so that fellow subscribers (myself included) are reminded that $EML is far from the only thrilling investment opportunity right now? 🙂

  14. Also wanted to say great write up Jeremy! Followed this train wreck on and off and never thought it would be investable! Appreciate your insights very much.

      • Don’t feel bad about the crazy trading. It’s a great write up and bound to generate enthusiasm! Things even out over time. You are doing really good work and I wouldn’t change anything.

        The ability to switch from short to long is impressive. I struggle with that flexibility.

      • I second that. The Raper Capital service as is super valuable. I am more than glad to keep on paying.

      • thank you very much for the kind words. i am just trying to do good work and share it with my subs. of course i expect most subs have to bear a worse entry point than me – something they signed up for, knowingly – but it stings when it is this kind of outsized, unreasonable move (esp for the further reasons cited, attracting algos, daytraders, spurring inquiries from the company, whatever). ultimately i think, and hope, the difference between 42 and 55 will still be cents on the $ of profits, for everyone, but if it retraces back to 45-50 in the next few weeks so everyone can get involved at a more reasonable starting point no one will be happier than me.

        and thank you for your support over a number of years! I really appreciate it, through the good and bad times!

  15. thanks jeremy for brilliant write ups, I like the Write-up for years, and it is frustrating to see those crazy volume, maybe it is a better way to limit the access to micro-cap, and do a A/B task for 150 subscribers, let’s say, devide the 150 people to 10 groups, each group have access to a new write-up at different time, and then it is easy to find out who actually do the leak, maybe a smart way to keep this service alive for a long time by kicking the disgrace folk to the street.

    • Hi Amos, funnily enough I had a similar thought.
      Might not be logistically possible with WordPress, and certainly a pain in the neck for Jeremy, but for low liquidity ideas, if we were sent the messages in small groups, where the group order rotated, (especially when there isn’t a clear catalyst in the next week) and we didn’t know if we were in the first or last group, that would certainly reduce the fire hose and make people think about the way they execute their trades. Currently the trading behaviour is actually being rewarded (ie if I’d been desperate for a fill on open I’d be up 15-20% in one day on this one) which then becomes self reflexive next time. It would also allow you to identify who the self serving fat fingered trader(s) is(are).

      I’ve tried to be fairly ambivalent to the crazy reactions both up and down (the drop at far has never come back) as I still hope that even just one good idea per year where the stars align (maybe Eml drifts back into the 30’s allowing me to consider it again) should be able to pay for the yearly sub, but this one was particularly irritating as the price action has totally changed sentiment here. Poor old Ron now try inks he’s onto a winner rather than capitulating into our hands at 30c…

      Still enjoy the analysis though and appreciate immensely Jeremy’s ability to articulate the ideas (JR has completely upended my blinkered disparaging opinion of a Bachelor of Arts/history).

      Jeremy, while I love the transparency and openness. It might be worthwhile keeping your conviction level tight lipped for a couple of weeks after a new illiquid idea. Some readers might just read ‘top 5’ and hit the ask.

      Also wrt mgi and the reproduction of the article, my personal feeling, as someone who missed out by a few pips after the idea was published and was interested to see if it drifted back towards 10.6, obviously wider dissemination would have been nice to be forewarned about. I get that the idea may have been well circulated in arb land, but equally any further megaphoning certainly wasn’t going to help me get another bite at the cherry.

      Sorry for the moans, I don’t mean to add to the cacophony, but best to get it all out in one go I suppose.

      Keep up the great work, and despite the issues I very much value the community and comments here.

      • I agree with the general sentiment, but think that, in practice, it would be far too tedious for Jeremy to implement.

        A few years ago I worked as a technical consultant and one of my clients was a small art dealer in Zürich. She was worried about the imagery being stolen from her site, so she had a mechanism in place to disable highlighting and right mouse clicks.
        While this is not perfect, it might make sense to do something similar for this site. If screenshots and the print function are disabled as well (and the full-text emails are disabled) this might make it hard enough for the leaker that they just stop (and annoy everyone else; but hey, it might work).

      • Thanks Daniel. I agree the proposal by Amos that I just tweaked slightly, is certainly unlikely to be logistically possible, but it could well work if it was.

        I’m not sure how wide spread the leaking or articles is, but I certainly don’t have my finger on the pulse. Maybe a sub goes crazy with nose in the trough and then sends out the articles to other to try to flip it? Otherwise it just seems dumb.
        Not sure how easy it would be to disable snip tool etc, but I can’t imagine it would be easy.

      • afraid it is really not easy and frankly far bigger, and more important sites than mine have chronic issues with leakage. no matter what i do, if someone – only one person – wants to share the content, they will find a way.

      • hey Simon,
        thanks for your reply, I agree with that it might not work for wordpress, but may be work if the writeup are sent in email form, it is easy to category, second, it is an alarm for those who do the fat finger or leak to street, they may change what they behave aha. hope that will solve this problem. Originally I thought it there are 500 sub and difficult to divide, with just 150 sub, might be easier to just do the A/B test.

      • thank you so much for the detailed comments Simon. I didnt realize you carried such a historical bias against the humanities, glad to correct you of that in one small way 😉

        lots of good points here. yes, the conviction level is being removed. yes, the language will be as toned-down as possible and a bit more dispassionate going forward (within the context of maintaining the personality and feel of my natural writing style).

        and yes, well taken on the MGI example. my apologies. in the future if this happens again – big if of course – subs will be notified in advance.

        thanks again for your support. it means a lot.

  16. Hi Jeremy,
    I’m a relatively new sub and found this situation as frustrating as everyone above. No need for me to re-hash what has already been said and hopefully I can pick up some shares if it softens over the next couple of weeks.
    The ‘leaking’ doesn’t make sense to me so I would be looking into WordPress as it seems pretty loose. When I was messing about on WordPress trying to subscribe to the emails and comments, I found that I was able to view a lot of your work without being signed in. Maybe there are several people outside your subscriber list that are viewing your work and in the process, reducing the value for your paid subscribers?
    As an interim solution, I would be happy if articles were emailed out.
    Cheers, Will

    • I think it’s a good idea to use email instead of WordPress if the leaks for the last two ideas actually happened. My concern is with the alleged leak and perhaps sending via email could be more secure.
      I have no idea why someone would leak when they’re paying for it and I think it’s something external.
      I’m not worried about a lower profit margin on a few ideas, in perspective Jeremy’s service is exceptional and has generated consistent returns from day one!
      My only problem would be the closure of your excelent service 🤗

      • thank you very much Diego for your ongoing support over many years!

        I am afraid email is not a solution at all. you may recall i used to send everything else in the body of an email. one click (forward) and that email is then out in the wild, and can be re-forwarded, etc. absolutely nothing i can do about it.

        now, if i use the email tool to theoretically find the leaker, thats something else. but again, i am not sure that would be any kind of solution, and it is mind-boggingly tedious (for me) – recall i am a one man shop just trying to do good investment research.

    • thank you very much. excellent point re WordPress. i am investigating some issues with regard to wordpress myself, this does seem like a further possibility. will keep you all posted.

      • previously I have been told I’m logged in as rapercapital – I didn’t try to actually test it and it resolved itself and I didn’t bother to contact you about it, but was a bit odd.

      • Ok, so, a couple points around leakiness and alternatives:

        1) If you are not logged in, you can still use the search bar at the top of the home page to search posts. Would take a bit of work, but if you have a clue, it’s pretty easy to confirm a ticker, and then get creative around searching for keywords like ‘top 5’.

        2) WordPress is famously shitty / leaky from a security perspective (it’s absolutely ancient). I would not be surprised if one or more people have found a way to view the content without being logged in. Maybe someone is also re-selling their password…

        3) FYI to your comment about not sending posts via email… i am subscribed to notifications, and this means that every new post you send comes straight to my inbox in full form (though without comments). And i can just fwd that on at will if I want (ofc i don’t). So… this is pretty leaky.

        4) Alternatives:
        – If you REALLY want to tighten up, you could consider Docsend (ie you are uploading a pdf basically), with a unique password per post, and you will be able to view statistics for every visit to the post, prevent anyting but screenshots, etc. However, we will largely lose comments ability which sucks.
        – Substack, Patreon, Memberful or a google for ‘paid membership newsletter platform’ = lots of options. I am sub’d to a paid Substack and once nice feature is that all logins are via a link you click in your emails, so there’s no password and therefore no password sharing.

        Anyway… hope this is of some help. Good lukc, this is a shitty situation for you and the subs. Your analysis is fantastic and i’ve learnt a lot from reviewing your write-ups, so thank you as always.

  17. I wonder how much this has to do with the existence of “larger” funds within the subscriber base. One hypothesis that has been posted is the existence of undisciplined subscribers who just lift the offer, then momentum players take over. The other possibility: if i ran/controlled a $500mm fund buying a 14-15mm shares around a 0.5 avg. to build a 1.4% starter position with a view towards averaging in over the next 2-3 weeks and growing this to a 5% position would be rational. I might not care too much about what i am initially paying as I have plenty of firepower to average in and theres more than enough upside to my PT. The cost of missing out on this idea is too high, and i know that if i dont get at least a little starter position on now ill regret it later.

    If this is indeed the problem the solution would obviously be to not let anyone controlling larger pools of money (say $100mm or $200mm cutoff?) onto the platform or create a separate non microcap product for them. I have no insight whether this is the root of the problem so Just thinking out loud here.

    • That’s a very good point but difficult to police.

      Nge capital are clearly subscribers (the Feb newsletter reveals ownerships in geo, dnk,evo, aue,smr). https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02641141-3A614512?access_token=83ff96335c2d45a094df02a206a39ff4

      So 1100 nge shareholders are actually benefiting from this service. Not sure how many other funds are subscribers.

      Having said that, I’m sure we benefit from Jeremy’s network of professional investors for idea generation and thesis formulation as well as scuttlebutt etc.

      • sorry not to detract from the point (which is a fair one, if there are large funds as subs, obviously they will think differently around deploying capital than smaller funds) – but NGE is NOT a subscriber. i simply think they are pretty sharp; they invest in quite a similar way as i do; and I swap ideas with those guys here and there (and as you can see there has been meaningful overlap in positions). i think i got up to speed on AUE through breaking it down with them; and pretty sure they got more bullish on SMR from talking to me (and EVO was that way too, even though it hasnt worked out that way). GEO we came at independently and then swapped notes; as you can tell they are still in the name whereas i checked out a long time ago. so there is decent overlap, but just for the record so their name is not besmirched at all, they are most definitely not subs.

        as to the broader point regarding policing what kinds of subs join – how exactly would i do this? people just signed up under a name right; even if i checked them all one by one on LinkedIn, half of the funds out there are secretive or whatever, or you cant tell anyhting about their fund from their linked in page, if they have one. then am i going to cut off a tiny family office (who may be a small player, relative to other individuals on here) just because they have a Linkedin fund profile? afraid that is simply not workable.

      • Jeremy is probably right in that my suggestion is extremely difficult to implement. I was more pointing out an alternative explanation for how we got here but agree that the fix would be really hard to implement

  18. I’m a new sub and am as frustrated as anyone by the price action on Friday. As Jeremy has outlined, no matter how compelling a thesis, i would have thought it’s to the benefit of all subscribers (for their own conviction) to do some of their own work on names or at least verify key points of the thesis. Especially with a name like EML with a bunch of hair on it and checkered history.

    Fwiw I’ve been following Jeremy’s work for a few years and was over the moon when a sub spot opened up a few months ago. I greatly value his work ethic and idea generation even though I work as a professional investor myself. It would be a shame to wind down the newsletter because of one or two bad actors.

    Perhaps not initially disclosing how big a position is in your book may help with those subs blindly following/leaking Jeremy? Beyond this its hard to control the moral hazard here i feel.

  19. A solution exists, exceedingly simple to implement. At no cost and only advantages,

    Could you please Jeremy AVOID disclosing your conviction level, at least for an initial period, until ideally the thesis is made public in a podcast or else. No more TOP 5. For shorts, just a quick reminder that they have to be sized small, obviously. That measure would also have the benefit to encourage subs to DYOR which is always welcome: let the community grow smarter as investors and regarding all the underappreciated ancillary skills of execution, risk and money management.

    And please tone down the pump if you can. List of taboo words: table banging, egregious, x-bagger, screaming BUY, maximum (-), once-in-a lifetime, generational wealth building opportunity, heinous this or that etc.. Again, just temporarily, until the thesis is out in the open. Why not let subs grow some brain and balls and make up their mind and understand the risk/reward and select suitable allocation, which is always artistic and highly personal and should not be a mimicking of your own portfolio. Most subs do not need their hand held and anyway this is an idea service not a portfolio management mandate we gave you.

    • i think this is excellent advice. i will remove all commentary around sizing/position conviction immediately. you will likely note that, ever since i closed the site to new subs, i really did tone down the language (and even though in this last piece I show the math around valuation and potential upside etc, i didnt think the language was too extreme – but i will try to tone it down further nonetheless).

      thank you for the suggestions.

      • I would not remove it entirely but not in initial write-up of small caps. As it is really helpful from a broader recommendation perspective. A lot of top 5 recommendations in the past where also large in terms of mcap. Then there is no issue

      • Agree with Bart.

        Ok for small caps to remove the “top five” wording in the initial post but i would like you to keep it in the live ideas section. Just update it a few days after the initial post when a few trading days have past.


      • I also agree with Bart and Johan.
        It seems to me like a good idea to remove initially the “top five” wording for small caps and just add it later in the live ideas section or in the weekly update, for instance one or two weeks later.

      • In contrast to the other comments here, I do not favour the removal of comments relating to conviction. And the removal of risk estimates and upside targets would depreciate this service. Yes this is only a research service, and no I do not enter every security Jeremy profiles. No I didn’t get an entry into MGI or EML.

        But every research piece involves considerable discretion/judgement, and IMO that judgement is a huge part of what Jeremy offers. We are not all credit analysts, and many of us will never have experience at Goldman.

        If it has to go, it has to go, but it will be a loss for me.

      • Agree with Whirly and others here. I found value in having the top 5 highlighted under live ideas. To remove that value from subs because of one situation with a microcap would be disappointing to me. Similar conviction has been expressed in the past on >$1b companies and didn’t move the needle the following day. I like the idea of delaying the live update to mitigate this, but hope it doesn’t get removed entirely

      • I think delaying the Live updates, or updating it fortnightly only for example, would be sufficient.

      • thank you for the feedback. let me remove the top 5 and see how we do for a while, and if there’s no appreciable difference or impact i can think about returning it.

    • Yep agree with this too, and certainly won’t hurt, but the level of effect will probably be limited. Hope I’m wrong.

      In retrospect the blinded (small) groups is probably unmanageable, but certainly would be a more meaningful fix.

      • This is an excellent idea and I agree with it. Would force people to do their own work and come to their own conviction regarding sizing.

  20. not mentioning conviction level or portfolio allocation initially (but in subsequent follow-ups), maybe releasing multiple ideas at once when possible and somehow making it harder to copy/paste the letters all seems like good ideas.

    I do appreciate whatever Jeremy decides and been a happy customer since day 1.

    • thank you Mikael. doing more than one idea at a time is, frankly, very challenging given 1) the availability of good ideas; and 2) my ability to digest, research, and publish them. but, every now and then I do smaller updates with more than one name at a time.

  21. Apologies re NGE, assumption is the mother of all… I’ve recommended them as an active lic to friends and family, and have had several interactions with them about ideas too, so didn’t mean to insinuate anything disparaging even if they were a subscriber.

  22. Pingback: Raper Capital weekly update: April 2, 2023 |

  23. A lot of comments here already but I cannot resist. I think you all are underestimating the risk of Jeremy deciding it’s just not worth doing this newsletter by whining about these stuff. I mean some of his best ideas are trading way below the price he initially recommended at times you have plenty of chance to get in better. I.e as recently as SMR ? What happened here is not unique to Jeremy, any credible small cap recommendations create outsized market impact on day 1. If you don’t find this newsletter helpful, just leave. For me, the education value of it is already worth the price.

    One thing tho I would recommend Jeremy to do is to raise the price of the subscription meaningfully so to keep the number of sub small and exclusive, and potentially ( very hard to do) get to know each sub a little better. Also it continues to incentivize Jeremy to keep this newsletter going.

    Any rec of Jeremy starting a fund makes no sense financially for most of us. How much do you think Jeremy will charge ( maybe not 2 and 20 if he is nice but can’t be much lower than that ) vs the cost of you getting the trade in + fee on this newsletter ? Unless your size is incredibly small it makes no sense.

    To sum it up , stop whining

    • I’m not sure raising the price significantly would help with the problem. My guess is that subs that move the market the most wouldn’t have the problem paying up, but for sure it would probably prevent subs like me from continued subscription. I use the service to get ideas and learn, but I also in no way shape or form move the market with my more or less insignificant volume.

      I get your point, I’m just not sure if it would help with the “problem” unless making sub number really, really small.

      Just my view, all depends on what type of service Jeremy wants to do.

      • yep there will be no price rises. i dont think it would do anything to solve the problem, and i committed when i raised them last time (2yrs ago) not to raise them for many years

    • I’m kind of amused that people are so worried about getting IN to these illiquid names. I’d be much more worried about getting OUT if the idea doesn’t work.

      • That wasn’t in any way a dig at Jeremy, of course none of us gets it right 100% of the time or anywhere near that. I just think people are focusing on the wrong thing.

    • I don’t think anyone is “whining” but rather pinpoint a real issue and discuss work-arounds.

      It’s not only about the subs convenience and economics, this kind of price behaviour and research leakage can cause all sort of potential regulatory headaches that are best avoided

  24. New sub. Too much garment rending in this thread IMO. We all shook our heads at Friday’s premarket action but D B’s takeaway above (ctrl+f for the words “My 2c”) is the right one. $EMR.AX had rare elements to invite groupthink and slippage. It happens. If you know how to build illiquid positions and avoid FOMO, you’ll profit from this service.

  25. I couldn’t read the entire thread but some of Jeremy’s comments. I couldn’t buy the stock neither. I am one of those guys who prefer missing an opportunity than falling into the FOMO trap, so I tend to buy one or two weeks later. And I advice subs to do the same, prices are generally much lower with a few exceptions.

    IMHO, there is something that can be done. I have a macro-subscription that is much more difficult to leak. Possible, but certainly more difficult. Please Jeremy dm or email me if something like that could help.

    Best, Jehu

  26. Might as well beat a dead horse – yeah this situation kinda sucks (and I feel like I’ve missed a bunch of entries over the past year vs when I first subscribed) but at the same time I don’t see much that can be done other than JR continue to tinker around the edges (tightening Word Press security, not disclosing conviction in the initial post, etc.). Also we as subscribers are all free to cancel if we no longer see the value because of leaks/pumps leading to unappealing entry points … nobody is forcing us to turn over our hard earned money for a newsletter service.

    And beyond that, how can you legislate for having animals as subscribers? Some real big brains running up TBRD only for it to level out a few weeks later. Maybe it’ll happen here on this one.

    Seems to me this site is a victim of its own success.

  27. I just wanted to make one comment on the Australian gambling cards business, as the way that people fund gambling accounts is evolving in a way that will reduce fees over time … [sorry for the longwinded comment, but I find it interesting]

    Remember that the key challenge with funding gambling accounts is doing it in real time.

    Several years ago banks started to came out and put a halt on funding gambling accounts via credit card – the evolution of that was quite interesting to follow. Initially they began processing them as cash advances rather than purchases (which have more fees, and charge interest from day 1), and it was Macquarie that was last to move on this and overcompensated by making noise about banning gambling transactions all together, and then others started to follow.

    So the EML cards would fill the void of the real time “card” deposits that have not been banned, but they are expensive to gambling companies as the interchange fees are high.

    Poli (owned by Australia Post), which is opens up a virtual internet banking session and transfers money from your savings account into the betting company’s account, then picked up the mantle for a number of real time gambling account transfers, but banks and gambling companies have reduced stopped supporting that too – suspect for security and fees charged. I thing only one of the big 4 banks still is available on that platform whereas 4 years ago they all were.

    6 months ago Paypal popped up and went from being supported by only a couple of betting companies to being supported by most. For the most part, deposits via Paypal need to be funded by a savings account rather than a credit card account. But I suspect the fees are not attractive for the gambling companies.

    More recently some gambling companies have started to use PayID, which is a relatively new capability in Australia’s new payments platform that lets you make transfers (a) in real time and (b) to people using things like email addresses. So some gambling companies (casinos and a few of the big bookies) have cut off Paypal and started issuing unique email addresses to each customer to which they can make a PayID transfer and have it credited to their gambling account easily. I expect that to increase in popularity over time as it becomes a fee-free way for gambling companies to get their customers to fund their gambling accounts. Most of the smaller bookies use off-the-shelf whitelabel bookmaking platforms and I’d guess they would be pushing this on the tech roadmap as it is free margin for the bookies.

    So this post was a really long winded way of saying that I’m not sure how much of this gambling card product is used for funding of Australian gambling accounts, but expect that that business line will come under pressure over the medium term as the bookies migrate to a lower cost product.

  28. Yes that’s correct Jeremy we have started swapping ideas since 8 years…how time flies… You matured as an investor like an alluring Australian shiraz, which analysis shows great depth, plenty of balance; subtlety in abundance, a sharp finish , even at times a hint of spice. And more often than not delivers oodles of chocolate.

  29. Since there are 117 comments, I don’t think much value to add but I would echo others here that there is value in knowing your level of conviction in an idea. Just curious but wondering about reducing the publicizing of new posts via Twitter, LinkedIn, etc.

    If there is a security lapse in WordPress, then your 30k+ twitter followers knowing when you’ve posted something just draws them to your site pretty immediately (understandably that’s part of the point) and if there’s some security lapse that allows someone to view the post without being a sub, the “leak” is out. Just a thought.

    More than anything, thanks, as always, for the very thoughtful posts. Even if we don’t make it into a trade, I do learn something new with every new post (which was one of my initial reasons for subscribing a few years back).

  30. Hi Jeremy
    Tk you for your detailed note. My questions irelating to non core :
    i) why are customers not walking post the regulatory mishaps of PFS and Sentinial? Will customers remain sticky?

    ii) Do the mishaps not result in any regulatory fines? The issues around inadequacies of compliance and risk controls may require some provisioning outside of the class action suits? Is this an unknown?


    • good questions. regarding 1) i think it most certainly a risk, at least within the PFS part of the business and particularly the PCSIL entity. for example, it seems quite likely that Correios (one of the largest clients) will not renew their contract with PFS post expiry this year or next, I think this is about 20-25% of revenues (within the PCSIL subsidiary) and thus perhaps a mid-single digit % of groupwide EML revenue. I would argue this supports the need to sell, divest, or wind down the PFS business – or at the very least the problematic PCSIL entity which is the focus of the current regulatory issues.

      2) Good question on fines. It is well within the purview of the CBI to levy fines, and they would consider things like the competence and effort of remediation work in their analysis of what kind of fine to levy. that sounds like bad news, and to be clear, there is some chance of a large fine number here (call it >$100mm).

      On the other hand – a fine would only be issued, if or when the entire issue is put to bed and a line drawn under it. thus the market would have to weigh the extent of any penalty against the reality that at that point the overhang had been fully lifted and the business is free to resume its growth again. as i tried to portray in the writeup, around $250-300mm of negative value was, conservatively, being priced into PFS, such that even a pretty large fine would not necessarily be taken negatively, in my view.

      i still believe the most likely outcome is a sale to a third-party, for some net positive number (either de minimis or not), that includes the regulatory penalty (probably borne by EML out of sales proceeds). removing PFS from core EML at anything close to a net positive (ie cash inflowing number), even with some regulatory penalty attached, should be extremely positive for the stock from here.

  31. I agree that when new ideas are posted it would be beneficial if there are no social media posts announcing a new idea, after all the subscribers already know, and it just encourages those outside the wall to try to find out what is inside.

  32. I too am incredibly grateful for the masterful writeup, and the compelling investment thesis. I exited my position two days ago to test the market, and found no shortage of willing buyers. Yesterday EML closed up another 5%. It may take an adverse event to actually bring the price back down.

    Bidding at open 15% above the prior close, at 4 x daily volume, seems rational behavior for an investor or investor group who knows “the word is out.” It seems to me less likely this is the action of a single subscriber shooting herself in the foot and spoiling things for everyone else.

    I wonder if password sharing is an issue here. Maybe “innocently” on a single occasion a year ago with a good friend…who shared the password in turn…

    For starters, perhaps we could all reset our passwords and logout of all devices, voluntarily or otherwise. Possibly in the future, as previously suggested, a more secure file sharing service might considered, ideally one with two-factor identification.

  33. important update this morning as the CEO has been fired; a newly appointed interim CFO seems much more CBI-friendly; and Barrenjoey has been hired to pursue all alternative (for the whole business, not just PFS). See here:


    I will have more to say once I consider the import of everything announced. Suffice to say for now, that, my original contention that the market would shift from ‘this is a dumpster fire’ to ‘what is this worth on a SoTP breakup basis’ is quite likely to happen, near-term. There is little doubt in the language that the board simply talked to most major shareholders and they said put it up for sale. Whether or not that means selling PFS; or other pieces; or the whole co, is largely immaterial as SoTP value here is clearly north of $1.2 in a variety of scenarios.

    If this werent already an outsized large position, I would add here as I think this trades to 75-80c or higher, in short order. I expect some kind of strategic resolution on the process in say six months, or sooner, and Barrenjoey – the bank hired – is a fairly aggressive and active newcomer in the Australian market known for getting things done.

    I need to do a bit more work on the pedigree and intent of the new interim CEO hire, but suffice to say any positive rapprochement with the regulators makes it easier to sell or extricate EML from that business, with lesser cost friction.

    More to come, will likely do a full update in the coming days.

  34. Anyone know if we should get a Q3 trading update (for period ended March) for EML? I can’t see any mention, appreciate a lot has changed but last year they did one late April.

    • good question. last year they did give a trading update, as you suggested. i have reached out to the company for an answer, will let you know. it is strange to see a change in policy this way (less disclosure rather than more), or perhaps they are just running delayed. i would have thought the most logical explanation for a lack of trading update/quarterly results presentation would be the imminent disposal/sale of the business. even with the amount of executive turnover/etc, they still have stated guidance, so i can’t imagine releasing quarterly earnings and holding a conference call is too much of a burden to ask even for an organization in transition. as you know i am less concerned with near-term results here and laser-focused on the strategic process, but either way it would be good to get some kind of update on where things stand, in advance of the august full year reporting.

      • Hi Jeremy – just wondered if you heard back from EML regarding the trading update?

      • yes – they decided not to provide an update given the reconstitution of the board and the disclosed ongoing sales process. i mentioned this was slightly unusual, but they suggested they would give a fulsome update, and guidance, at the annual results briefing in august. obviously they remain bound by continuous disclosure obligations, so i doubt the near-term numbers have changed much beyond the context of what has already been disclosed (not that they are relevant to the investment case/thesis).

        for what its worth, i have been adding shares here and there most every day. nothing has really changed other than the price, i still expect this sold/broken-up one way or another in 2023 and expect this to be worth far more on a SoTP basis than the current quote. the market however is clearly not in the mood to be patient…

  35. i think i have come down with Covid so this will simply be a brief update, the full update post CC, chat with management, and fine-tuning model will follow in a few days. at a high level I think the reported numbers are fine, and the thesis is progressing very well. Very high level, the business kept growing – revenues and gross profits – across segments last year, despite all that is going on; if you annualize for new interest rates and remove simply what they’ve said is achievable on costs ($10mm) you get something like $60mm of EBITDA this year – before any return to organic growth or further cost outs (which seems incredibly likely).

    on the strategic front, the big development was 1) they had been approached by a number of parties (not a huge surprise but glad to see) and 2) they had split the Irish domiciled business from the UK piece, within PFS. Not sure this means they are going to sell PFS (Ireland), or UK; or keep the UK piece and put the Irish piece in run-off. but slide 19 of the deck discloses that PCSIL Ireland houses $35mm of costs and is unprofitable – the first time this cost siloing by geography has been given that I can recall – and obviously even if some of those costs transferred to the UK entity that remains, the look-through PnL impact would be huge.

    i will have to sit down and go through all the details but it seems like all the original options remain on the table here – full sale; partial sale; structured exit from PFS; etc – and given the UK/Ireland split it seems much more likely they get something of value for at least the UK-domiciled part of PFS (still with $3.6bn of GDV), whether they end up selling it, merging it, or running it clean. I still think the outcomes here are quite favorable: $60-70mm of EBITDA against an EV today of about $390mm is far too low given the majority of that EBITDA is G&I where comps trade double-digits. This still accords no value to whatever is salvageable from PFS. Even if it is just the UK domiciled business, the SoTP gets up well north of $1.5, so the move in the equity today is rational but still skeptical.

    I still think we see a resolution on the strategic side in the next six months; they mentioned the AGM as a further update on the split at PFS (and the UK remediation piece should be well advanced by then), i imagine they are at prettying it up for a sale or something like that.

    will follow up with more fleshed out thoughts in the coming days.

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