Regional Expansion And New SME Products Will Drive Future Lending Opportunities

Key Takeaways

• Regional expansion and new business bankers are expected to drive growth by increasing lending and positively impacting future revenue.
  
• Strong Net Interest Margin and proactive portfolio management enhance earnings and reduce impairment expenses, supporting profitability and revenue growth.
  
• Leadership changes may impact governance; loan growth focus and market expansions face risks from economic conditions and competition, potentially pressuring margins and earnings stability.

Catalysts

Through its subsidiaries, engages in the provision of various banking products and services for small and medium businesses in Australia.

• Judo Capital Holdings' expansion into regional areas and the recruitment of additional business bankers are expected to drive growth, providing opportunities for increased lending, thereby impacting future revenue positively.
  
• The company's strong Net Interest Margin (NIM) trajectory, bolstered by upgraded guidance and a well-managed funding structure, is likely to contribute to improved earnings.
  
• Judo's proactive portfolio management and credit quality stability are poised to enhance net margins by reducing impairment expenses and maintaining a strong risk profile.
  
• The development of a warehouse lending business presents a unique opportunity for growth with relatively fewer competitors, aiming to generate additional revenue streams and further improve profitability.
  
• Plans to introduce additional SME products and optimize other operating income are potential catalysts for revenue growth and offer pathways to increase net margins and overall returns.

Judo Capital Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Judo Capital Holdings's revenue will grow by 24.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.9% today to 35.2% in 3 years time.
• Analysts expect earnings to reach A$221.7 million (and earnings per share of A$0.19) by about April 2028, up from A$64.9 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$156.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.6x on those 2028 earnings, down from 28.9x today. This future PE is greater than the current PE for the AU Banks industry at 12.5x.
• Analysts expect the number of shares outstanding to grow by 0.73% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.09%, as per the Simply Wall St company report.

Judo Capital Holdings Future Earnings Per Share Growth

Risks

• The transition of Peter Hodgson stepping down as Chair and the appointment of David Hornery could lead to strategic shifts or potential instability in leadership, impacting the company's governance and its ability to maintain consistent revenue growth.
  
• While regional and agriculture market expansions are cited as growth areas, economic downturns or unfavorable climate conditions could affect loan performance and revenue in these segments.
  
• Although Judo Bank's lending margins are strong, increased competition from major banks and private credit lenders, especially in commoditized lending, may pressure margins and reduce net interest income over time.
  
• Changes in economic conditions, such as interest rate cuts, while beneficial to customer solvency, could slightly reduce net interest margins, impacting profit growth projections.
  
• The emphasis on fast loan growth, with higher risk-weighted assets, could lead to increased credit risk and higher provisions, impacting net margins and stabilizing future earnings adversely.

Valuation

• The analysts have a consensus price target of A$2.146 for Judo Capital Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$2.6, and the most bearish reporting a price target of just A$1.35.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$629.0 million, earnings will come to A$221.7 million, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 7.1%.
• Given the current share price of A$1.68, the analyst price target of A$2.15 is 21.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.