A big mover in morning trade today has been Emerchants Ltd (ASX: EML), now known as EML Payments Limited.
The shares of this prepaid financial card provider have started the year strongly with a 5% gain to $1.92 after it announced a deal with salary packaging market leader McMillan Shakespeare Limited (ASX: MMS).
Subject to approvals the multi-year agreement will see EML Payments provide salary packaging prepaid cards to McMillan Shakespeare and its customers from July 2017.
EML Payments' managing director and CEO Tom Gregan has labelled the agreement as "one of the most important agreements we have signed."
The company has regulatory changes to thank for this major agreement. Following recent changes to interchange rates by the Reserve Bank of Australia, the two banks which had previously provided salary packaging cards in Australia decided against providing these cards beyond July 2017.
Not only is the agreement expected to open up a significant new long-term vertical for the company, it is also expected to cause the number of active reloadable accounts and debit loads on reloadable products to increase by approximately 40-50% year on year when it commences in July.
I expect this and existing deals with the likes of bet365, William Hill, and Star Entertainment Group Ltd (ASX: SGR) should help the company continue to grow earnings at a strong rate for the next few years.
In FY 2016 the company processed a massive $2.7 billion in payments through its 7.3 million active cards. This led to earnings before interest, tax, depreciation, and amortisation growing a whopping 111% year on year.
I'm confident that EML Payments has an extremely bright future ahead of it. However, the market has priced in an incredible amount of growth which makes an investment a little too risky for my liking at this stage.
At 650x trailing earnings its shares run the risk of taking a sharp dive if its growth fails to live up to expectations. For this reason I would suggest investors approach this one with caution.
