EML Payments sets aside $10.5m provision for Shine class action

EML Payments sets aside $10.5m provision for Shine class action

EML CEO Tom Cregan believes a decline in foot traffic and restrictions in key markets such as Germany and the UK indicates a $100 million decline in gross debit volumes due to Omicron. Photo: Rick Jack, via Unsplash

An otherwise positive half-year result for Brisbane-based gift and reloadable card company EML Payments (ASX: EML) has been overshadowed by a $10.5 million provision for legal costs in relation to a class action brought by Shine Justice (ASX: SHJ), which CEO Tom Cregan described in a conference call today as "baseless and opportunistic".

Cregan said the provision was excluded from underlying EBITDA, a figure that was down 4 per cent at $26.9 million in the December half while group revenue rose 20 per cent year-on-year to $114.4 million.

Shine's legal action concerns EML's disclosure obligations surrounding regulatory compliance issues with the Central Bank of Ireland (CBI) - a matter connected to the fintech's Irish subsidiary that covers a significant chunk of the group's European operations. 

When the EML revealed the CBI's investigation into its anti-money laundering and counter-terrorism compliance  in May last year it lost more than $800 million in a single day, and shares have been volatile ever since as updates continue.

The CEO was upbeat in today's conference call however, noting gross debit volumes (GDV) were up 209 per cent to $31.6 billion, in part due to the acquisition of Sentenial, whose eponymous UK subsidiary and French subsidiary Nuapay are not related to the business under scrutiny from Irish regulators.

Cregan said the 4 per cent decline in earnings was a reasonable result considering an increase in overheads of approximately $6 million in Europe, particularly for risk and compliance, but also the impact of Omicron on European shopping malls in December.

"We are implementing our remediation plan with the Central Bank of Ireland, which obviously requires significant resources and management focus," he said.

"So to grow 20 per cent in the midst of a regulatory investigation talks to the revenue diversity of the business and our ability to generate revenue growth from existing customers.

"In the second half of the year we expect to see a recovery in in revenue growth - growth rates and gross margin - as we sign and launch new programs in Europe."

The executive emphasised that EML's ability to launch programs in Europe in December, and submit new contracts for approval, came about in part because of the company's commitment to its remediation plan with the Irish regulator.

"So the priority for us was not about expense management in the half, but making the investments needed - hiring senior executives to the team, and employing independent directors for the PCSIL (Irish company) board," he said.

He added the board also believed that without the impact of Omicron, the company would have recorded an additional $100 million in GDV.

"Of course, it is difficult to be prescriptive about that, because proving causality solely on Omicron is hard to do, but that's our view - certainly looking at lower foot traffic and restrictions in the UK and Germany as two key markets.

"Despite our regulatory challenges in in Europe, I think our sales team have done a great job in continuing to build out the pipeline. Having looked at this recently, our win rate on the prepaid business is holding at 40 per cent."

With regards to the Shine case, he said the group would be asking the Supreme Court of Victoria to deposit the amount with the court "so that they can cover our costs when we win".

"In general terms, we consider this to be both baseless and opportunistic, and it's in the commercial interest of Shine to drag this out and maximise their fees," he said.

"We've taken this provision and investors should expect this to play out over the next three years." 

At the time of writing, EML shares were down 8.61 per cent at $2.76 each.

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