AI Lending And Spain Expansion To Improve Global Reach

Key Takeaways

• Strategic reacquisition and inventory shifts are poised to bolster margins and profitability through operational integration and high-value retail focus.
  
• Expansion in lending and international networks could spurt future growth by tapping into new demand and strategic global opportunities.
  
• Regulatory changes and a shift in business focus may lead to reduced margins and earnings due to reliance on personal finance demand amidst economic pressures.

Catalysts

Operates as a franchisor and retailer of second-hand goods and financial services stores under the Cash Converters brand name in Australia, New Zealand, the United Kingdom, and internationally.

• The strategic reacquisition of franchise stores, particularly in the U.K. and Australia, is projected to integrate earnings into the corporate business, potentially enhancing operating earnings and net margins.
  
• Expansion in the loan book, with a specific focus on the MACC and Line of Credit books, could drive future revenue growth by catering to sub and near-prime borrowers, particularly as demand for personal finance increases.
  
• Technological advancements, such as AI-powered credit models and improved banking rails, are expected to enhance the efficiency and reliability of lending operations, which could improve net margins by reducing credit losses.
  
• The transition towards smaller, high-value inventory stores and new retail concepts is predicted to improve gross profit margins by reducing overhead costs and concentrating on luxury items with higher margins.
  
• Exploration of strategic opportunities, including international expansion options in Spain and a substantial investment pipeline, indicates potential future revenue and earnings growth as the company leverages its global brand and network.

Cash Converters International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cash Converters International's revenue will grow by 11.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.4% today to 7.5% in 3 years time.
• Analysts expect earnings to reach A$36.8 million (and earnings per share of A$0.05) by about May 2028, up from A$19.5 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 9.2x on those 2028 earnings, up from 7.7x today. This future PE is lower than the current PE for the AU Consumer Finance industry at 10.2x.
• Analysts expect the number of shares outstanding to decline by 0.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.3%, as per the Simply Wall St company report.

Cash Converters International Future Earnings Per Share Growth

Risks

• Regulatory changes to the small credit contracts, especially the small loan products, have led to a reduction in high-yield contributions, which could impact revenue and margins as the business shifts focus to other loan products.
  
• The transition away from the vehicle finance business is expected to take 24 to 36 months, potentially leading to subdued earnings in that period as the company allocates resources to run down the book responsibly.
  
• The increase in interest expenses from $16 million to $22 million in FY '24 highlights vulnerability to fluctuating interest rates, which could further erode earnings if rates rise.
  
• High reliance on personal finance demand with elevated cost-of-living pressures could hinder growth if consumer spending patterns change or if the economic environment deteriorates, impacting net margins and earnings.
  
• Noncash goodwill impairment in New Zealand indicates potential risks in international operations, reflecting general market sentiment and possibly affecting future financial performance and impairments.

Valuation

• The analysts have a consensus price target of A$0.42 for Cash Converters International 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$493.4 million, earnings will come to A$36.8 million, and it would be trading on a PE ratio of 9.2x, assuming you use a discount rate of 9.3%.
• Given the current share price of A$0.24, the analyst price target of A$0.42 is 42.9% 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.