EML Payments Ltd (ASX: EML) has indeed charted a tumultuous course over the last five years, captivating investors with its roller-coaster share price and stirring the investment community with its complex structure and bold acquisitions. Peaking at an enviable high of over $5 in April 2021, the company’s valuation has since experienced a significant recalibration, prompting diverse perspectives and intense scrutiny.

Yet, in the intricate tapestry of investing, contrarian strategies often reveal hidden opportunities. Embracing the philosophy of second-level thinking, as championed by esteemed investor Howard Marks, involves peering beyond the immediate and discerning the deeper, often nuanced implications of market movements and corporate decisions. This mindset, focused on probabilities, uncertainties, and the potential reactions of others, has illuminated strategic entry and exit points in EML, even amidst the most challenging phases.

Right after understanding the company’s journey, recognising the principle of “buying well” becomes essential. This approach shines especially when market sentiment overreacts to the downside, often due to panic selling in response to unsettling news. For those knowledgeable about EML Payments, such periods of pessimism open doors to opportunity.

The journey of EML Payments has not been without its hurdles, most notably beginning in May 2021 with regulatory challenges in Ireland. The Central Bank of Ireland raised concerns about the anti-money laundering systems of EML’s subsidiary, PFS Card Services Ireland Limited (PCSIL). This led to a comprehensive remediation program, marking the start of a challenging period that impacted shareholder value. Since its acquisition in March 2020, PCSIL has seen several write-downs, reflecting the constraints imposed by regulatory scrutiny.

Adding complexity to EML’s landscape was the acquisition of Irish fintech Sentenial, which also faced its own set of challenges, including write-downs stemming from fraudulent transactions. These issues prompted a strategic reassessment within EML, with the Board refocusing on fortifying its core business segments, particularly the profitable Gifting and General Purpose Reloadable (GPR) cards sectors in Australia and the UK.

Now, fortunately for shareholders, the above appears to be coming to an end. The company recently announced its exit from the PCSIL business bringing to a close the CBI concerns and significant cash outflows.

EML Chairman, Luke Bortoli, commented:

Furthermore, as announced at the Annual General Meeting (AGM) in November the business has received expressions of interest for the Sentenial business.  These moves mark significant steps towards a simplified streamlined and profitable looking EML. ​

As EML Payments turns the page on the costly PCSIL and ICB controversies, the path ahead bifurcates into two distinct trajectories. The company’s remaining core segments – Gifting, Australia GPR, and UK GPR (or PFSL UK) – stand on solid ground, boasting robust EBITDA margins, substantial free cash flow, and secure long-term contracts. With the European operations untethered from PCSIL, the company emerges as a considerably more appealing acquisition target, free from the shadows of previous regulatory concerns.

Alternatively, EML’s renewed focus on its core offerings presents an opportunity for the company to re-establish itself as a formidable and profitable entity. The divestiture from PCSIL eliminates not only considerable earnings losses and cash drainage but also a major managerial distraction, freeing up resources to enhance the main business.

While the recent AGM may have missed an opportunity to fully delineate the financial landscape of this streamlined EML, the market may not yet fully appreciate the value proposition post-PCSIL, especially considering the substantial annual cash savings of around $20 million. Nonetheless, the projected changes are poised not to affect the FY24 estimates, with an expected underlying EBITDA of $52-58 million, marking a significant 40%-56% increase from FY23’s $37.1 million, signalling a promising horizon for EML Payments.

Investing in opportunities like EML Payments, particularly during periods of market scepticism, inherently involves embracing risk and contrarian thinking. It’s about seeing beyond the prevailing pessimism, recognising the long-term potential, and strategically positioning oneself. “Buying well” in this context means identifying entry points that not only promise a reversal of fortunes but also align with the calculated risk-return profile that discerning investors seek.

Disclosure: EML Payments Ltd (ASX: EML) is currently held in TAMIM Portfolios.