Can EML shares recover from discovery of fraudulent incident?

ASX-listed fintech company EML Payments has seen its share price dive on the discovery of fraudulent activity at its Sentenial business.

The market may have overreacted, however, as the development arrived just following the release of impressive results for the 2022 financial year that helped to boost its share price days earlier.

Fraudulent incident uncovered at Sentenial

On 24 August, EML announced that its Sentenial business had identified fraudulent activity involving merchants within its direct debit processing business.

According to EML, the fraudulent activity mainly took place in August 2022 before coming to its attention on 23 August.

The company said it is investigating the fraud and will take steps to recover any losses, which could be as high as AUD$7.9 million.

The news brought EML’s share price down 15% in trading on the day of the announcement, helping to erase gains posted earlier in the same week on strong full-year results.

Record revenue in 2022

The revelation of fraud at Sentenial arrived after EML’s share price rose days earlier on impressive results for the 2022 financial year.

EML’s share price was up around 10% in afternoon trading on Monday 22 August, the day following the release of its financial results. The bounce arrived despite the ASX 200 sliding 1% on the same day.

According to its FY2022 financial results, EML Payments saw growth in revenue of 21% to reach a record high of $234.1 million.

$17.9 million of this revenue was non-recurring and related to the back book of inactive cards, leaving FY22 revenue of $216.2 million and organic revenue growth of 17%.

Net interest revenue dropped 73% in FY2022 to $1.4 million, compared to a print of $5.4 million in the 2021 financial year.

EML upbeat on rising interest rates

EML says that ongoing rate hikes by the world’s major central banks are of benefit to the company due to its large stored value float.

As at 30 June 2022, EML held the AUD equivalent of $2.2 billion in its stored float. $1.7 billion of this float was in the form of cash and the remaining $0.5 billion was in low-risk bonds.

EML said that rising interest rates will enable it to reap higher returns from this war chest of highly liquid assets.

‘Central banks around the world continue to tackle high inflation and as a result are aggressively raising interest rates,’ EML said in its financial report.

‘Across the various currencies we look to achieve a return equivalent to the respective currency central bank rate, through a combination of our existing banking deposit agreements and bond investments’.

Cash flow confidence supports share buyback

EML has also announced a share buyback initiative that could have an impact on market sentiment.

On 22 August, EML announced that it plans to purchase up to $20 million of its own shares on an opportunistic basis, during the 12-month period that starts on 5 September 2022.

The purchase is part of EML’s capital management strategy and will find support from the company’s $73.7 million closing cash balance at the end of the 2022 financial year.

The company also just reaped $10.6 million in cash from the sale of its stake in Interchecks Technologies. According to EML, the sale represents a four-fold return on its initial investment in the Florida-based fintech start-up.

EML expressed confidence in strong cash flow for the upcoming financial year, enabling it to both drive growth and deliver returns to shareholders.

‘EML’s robust balance sheet and consistently strong operating cash flow generation will support our ongoing growth and development of the business whilst returning cash to shareholders,’ said EML Group CEO Emma Shand.

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