Question 1: I would very much appreciate your opinion on EML Payments (EML), for which I paid $2.90 a share. The current price is 55c, so my losses are big. I am thinking of averaging down and buying some more. Has EML a future in 2023?
Answer: Has the knife stopped falling with EML Payments (EML)? I guess that is the question.
Last Friday, EML reported that the Irish Central Bank would impose a 0% growth cap on their receivables for the next 12 months, which will severely impact their ability to grow revenue in their European operations (about 30% of their business). It also means that their remediation actions to address perceived AML weaknesses haven’t been sufficient. On a positive note, EML reconfirmed guidance on revenue of between $235m to $245m and EBITDA of $26m to $34m for FY23. On a multiple of EV/EBITDA, this makes EML look cheap.
In the main, the broker analysts see potential upside, but the divergence of opinion is wide. According to FN Arena, the consensus target price is $1.19 (a range of $0.68 to $1.70), 120.4% higher than the last ASX price of $0.54.
My sense is that EML is very, very cheap……..but I don’t see the market hurrying to buy the stock until they have addressed their regulatory issues. If you can be very patient, hang on. If you need the cash or “clear air”, take your medicine and book the loss. There is an old saying that “your first loss is your best loss” and more often than not, this turns out to be the case.
I am not in the “average down” camp.
Question 2: With the RBA pausing on interest rates, have term deposit rates peaked?
Answer: Look more at the action in the bond market rather than the RBA’s announcement, but yes, I think we may have seen a near term peak in term deposit rates. If rumblings about banks or bank liquidity issues persist, there will be pressure on our banks to pay up to get retail and business deposits – so term deposit rates will stay high. However, if this calms down (as seems likely) and the market looks more at macroeconomic settings (i.e. inflation and as a result, what the RBA is doing), expect some easing in term deposit rates.
Question 3: What is going to happen with Suncorp Bank now that the ACCC has expressed some reservations on the sale to the ANZ? Is this a negative for Suncorp (SUN) shares?
Answer: The ACCC hasn’t blocked the deal (yet). However, it has set out a preliminary view on the competition issues and called for additional submissions. It is set to make a ruling by 12 June.
Reading the “tea leaves”, it looks like it will be hard work for the ANZ and Suncorp to convince the ACCC to give the deal the tick. The ACCC doesn’t seem convinced that putting the number 4 bank in home loans (ANZ) with a significant regional bank (Suncorp) will improve competition with the number one, two and three lenders (the other major banks).
What does this mean for Suncorp? Most likely, the acquisition will be blocked. What does it mean for the Suncorp share price? Probably a net positive because there wasn’t much of a share price premium on the sale to ANZ, and arguably, it puts back into play the prospect (although slim) of a tie up with BOQ or Bendigo & Adelaide Bank.
Question 4: How do broker analysts calculate target prices?
Answer: This is one of the “dark arts” – there is no standard formula for this.
Many broker analysts use a discounted cash flow analysis where they forecast the company’s earnings for as many years as they can, and then discount the earnings to give a valuation in “present day” dollars. Apart from the earnings forecasts, the two big variables in this calculation are the “terminal value” (they can only forecast with any confidence for a handful of years), and the discount rate used to bring back the “future dollars” into “present day dollars”. They might overlay this calculation with a comparison on market multiples (for example, current enterprise value to last 12 months’ earnings or next 12 months’ earnings) to see how they line up.
It is a “dark art”. They will argue that it is analytically robust – but there is an awful lot of judgement/feel that goes into the target number.
