Broker Technology Investments And Fintelligence Acquisition Will Strengthen Future Prospects

Key Takeaways

• Investment in broker technology and equity acquisitions enhance distribution revenue and efficiency, boosting EBITDA and future growth prospects positively.
  
• Improved net interest margin and subscription income growth signal enhanced financial performance, with lower funding costs supporting increased net profit margins.
  
• AFG's reliance on broker expansion and market share growth is risky, with potential negative impacts from economic conditions and increasing competition.

Catalysts

Engages in the mortgage broking business in Australia.

• The investment in broker technology and increasing number of brokers show potential for enhanced distribution business revenue and efficiency, contributing to gross margin growth.
  
• Expansion of the AFG Home Loans book and the securities loan book alongside improved net interest margin (NIM) is likely to boost earnings and contribute to financial performance improvements.
  
• Strategic equity investments in broker groups and complete acquisition of Fintelligence present new avenues for income generation, impacting EBITDA and future growth positively.
  
• Growth in subscription income from technology enhancements like BrokerEngine Plus indicates increased broker productivity, which could enhance revenue per broker and overall net margins.
  
• Reduction in funding costs for securitization and managing credit quality effectively can contribute to an increase in net profit margin, represented by higher profit before tax and lower credit risk exposure.

Australian Finance Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Australian Finance Group's revenue will grow by 9.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.6% today to 3.7% in 3 years time.
• Analysts expect earnings to reach A$54.4 million (and earnings per share of A$0.18) by about March 2028, up from A$29.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.1x on those 2028 earnings, down from 15.3x today. This future PE is lower than the current PE for the AU Diversified Financial industry at 16.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.4%, as per the Simply Wall St company report.

Australian Finance Group Future Earnings Per Share Growth

Risks

• The company's investment in broker technology and new broker recruitment, while aimed at increasing efficiency and market presence, represents a significant cost. If these investments do not yield the anticipated revenue growth, it could negatively impact net margins.
  
• Economic conditions, such as changes in interest rates or property market slowdowns, could affect the mortgage market where AFG operates, impacting revenue from their distribution business, which contributes 82% of their gross margin.
  
• AFG's growth strategy heavily relies on expanding its broker network and increasing market share. If the number of branch reductions does not continue or non-banking competition intensifies, it might constrain future revenue growth.
  
• A significant portion of AFG's earnings are annuity style, which provides stability but also limits short-term profit growth. If there is a rapid increase in credit costs or economic volatility, this could impact future earnings projections.
  
• The financial performance of AFG's manufacturing segment depends on improving net interest margins and achieving higher book values; however, competition or unfavorable economic conditions could adversely affect these margins or lead to higher credit risk, impacting overall earnings.

Valuation

• The analysts have a consensus price target of A$1.765 for Australian Finance Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$1.5 billion, earnings will come to A$54.4 million, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 11.4%.
• Given the current share price of A$1.68, the analyst price target of A$1.76 is 4.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.