3 Picks for an Inflationary Environment

3 Picks for an Inflationary Environment

10 Feb, 2022 | Stock Insight

2022 hasn’t started like most people were hoping with January being the worst start to a year on record, the S&P500 being down -11%, at one point. The ten largest stocks on the index were down -20% at one point and the average Nasdaq stock was down -50%. In Australia, the tech index hit an intra month low of -25% while the Small Ords was down -13% at one stage. This week we have seen a bounce back in equity markets but one could argue that we are in bear market territory based on some of those figures, yet there’s no global recession in sight.

Ron ShamgarAuthor: Ron Shamgar

​In our view, this is primarily caused by inflation concerns which will lead to higher interest rates this year and next. We are of the view that inflation will ease in twelve months as Covid-related supply bottlenecks and labour shortages ease up. In saying this, some companies are actually significant beneficiaries from an inflationary environment and higher interest rates, today we highlight three:

EML Payments (EML.ASX)

​​​EML Payments Limited (formerly EMerchants) are a provider of payment solutions; offering payment technology for payouts, gifts, incentives and rewards, and supplier payments. EML issues mobile, virtual and physical card solutions to a number of corporate brands around the world and manages more than 3,500 programs across 26 countries in North America, Europe and Australia.

EML has seen a depressed share price since announcing its issues with the Central Bank of Ireland (CBI) in May of last year, even though these issues have since been resolved. It makes no sense that EML is still trading at half the market cap they were since resolving their CBI correspondence. EML is now trading at a lower multiple to its peers despite their FY22 guidance being reaffirmed, which should see a 30% increase in EBITDA. Their pipeline is huge at $10.5bn while their recent acquisition of Sentenial and their contract with Banco Sabadell gives them a huge presence in Europe. Heading out of lockdown and into Christmas they would have also seen an increase in their gifts and incentives segment. EML is sitting on an EV of around $1.05bn, we believe EML will do at least $80m of EBITDA in FY23 which will put them at a forward EV/EBITDA of around 13x.

EML 2021 AGM Company Guidance

Source: EML company filings
​EML will be a big beneficiary from rising rates. As a global E-money issuer, they currently hold a growing balance of customer card funds worth $2bn. EML gets to invest those funds but, with rates at zero, they aren’t making any return at the moment. Going forward, investors should think that for every 1% rise in rates across the US/UK/Euro, EML should earn $20m of incremental profit. If rates rise 2-3% over the next couple of years, EML will earn an incremental $40-60m of profit (2-3x their current profitability). We don’t believe investors have fully grasped this and it is why EML is our top pick for 2022.

PeopleIn (PPE.ASX)

​PeopleIn, formerly People Infrastructure, is a provider of workforce solutions mainly in health and IT. Services provided by the group include recruiting, on-boarding, contracting, rostering, timesheet management, payroll, and workplace health and safety management. The four main sectors PPE is targeting include healthcare, community services, industrial services and information technology. PPE has a track record of successfully acquiring and growing businesses through leveraging its core capabilities in the sourcing, skilling, deployment and management of workforces

PPE has a strong pipeline of acquisitions and is well funded to pursue them with $50-70m of available funding through debt and free cash; given their strong funding, the strategy is non-dilutive to shareholders. Their past acquisitions have been earnings accretive and have expanded the industries PPE operates in. Their most recent acquisitions, Techforce Personnel and Vision Surveys, increased earnings per share by 19% and the combined deal was done on a valuation of approximately 3.7x pro forma EBITDA. Their acquisition strategy opens up new regions for PPE to capitalise on and creates a much bigger addressable market for the group, as seen by their move into the healthcare recruitment space.
PeopleIn's Addressable Markets of Focus

Source: PPE company filings
PPE provided a robust update recently, confirming FY22 earnings to be within analyst expectations (PE multiple of 12x). Their business is a massive beneficiary of wage inflation driving higher margins as they earn a commission. In addition, low levels of unemployment in Australia and a high turnover of employees, are all factors seeing higher demand for PPE services. With the borders reopening PPE should benefit from the resumption of international labour. Next catalyst for the stock is acquisitions which they have been very disciplined on. Our valuation is $5.00.

Note: At the time of writing, PPE announced the acquisition of  Perigon Group, a  leading accounting recruitment business, which will be key in executing PeopleIn’s growth plan with high anticipated growth expected in finance and accounting recruitment services over the next five years. Annualised expected EBITDA contribution of ~$4.3m and earnings per share accretion of approximately +8% in FY23. Upfront consideration of $16m (on a cash and debt free basis) representing a multiple of 3.7x pro forma expected FY23 EBITDA


​OFX is a provider of Forex services to consumers and corporates globally. As revenue is transaction based, OFX is a beneficiary of elevated inflation. Last week OFX provided a strong Q3 update with revenues up 21% to $39m. Management has upgraded FY22 guidance from 10% growth to 17-22% revenue growth. We think that’s conservative based purely on the Q3 run rate.
Firma Acquisition

At the back end of last year, OFX announced the acquisition of Canadian foreign exchange business Firma for AUD $98m, representing 9x Firma’s LTM EBITDA. The deal will mostly be funded through a new $100m debt facility OFX has secured, meaning the deal is not dillutive for shareholders. The acquisition is part of OFX’s strategy to increase their presence in North America and it will allow them to further leverage their sponsorship of the NHL.  Firma will add over 9,600 clients, increasing OFX’s North America revenue by 121%.
OFX pro-forma growth

Source: OFX company filings
 Firma will add $50m of revenue and approximately $11m of EBITDA to the group. The deal makes a lot of sense; it will be immediately EBITDA accretive and give OFX increased exposure to corporate clients who are more stable than the consumer market.


As mentioned, OFX is a beneficiary of elevated inflation. We have already touched on their strong Q3 update (revenues up 21% to $39m) and upgraded FY22 guidance (to 17-22% revenue growth) which we think is conservative based on the Q3 run rate. The above  acquisition should see EBITDA grow to $55m in FY23, placing OFX on a 10x EV/EBITDA valuation. This, in our view, is cheap compared to global peers and we think OFX is worth $3.00. OFX have been buying back shares and will be releasing their full year results mid-May.

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