Accelerate Transformation Will Increase Operational Efficiencies

Key Takeaways

• The Strategic Pathways and Accelerate programs aim to capture new market growth and improve margins through operational consolidation and efficiency.
  
• Share buybacks and balance sheet financing transitions are expected to enhance EPS and net interest margins, ensuring sustainable long-term earnings.
  
• FleetPartners Group faces potential profitability challenges from declining used car prices, earnings strain from lease provisions, and economic uncertainties affecting revenue growth.

Catalysts

Provides fleet management services in Australia and New Zealand.

• FleetPartners' Strategic Pathways program targets underpenetrated markets, resulting in significant growth. Continued focus on these growth areas, particularly with EV demand, is expected to drive future revenue increases.
  
• The Accelerate transformation program is aimed at consolidating brands and systems to increase operational efficiencies, which will likely improve net margins over time as cost reductions and economies of scale are realized.
  
• The continued share buyback program, which is expected to reduce the share count significantly, is a catalyst for EPS growth by returning capital to shareholders and enhancing shareholder value.
  
• As new business writings increase and AUMOF (Assets Under Management on-balance-sheet Funded) grows, FleetPartners anticipates a rise in recurring revenue, providing a stable base for sustained earnings increases.
  
• Management’s focus on transitioning funding to balance sheet financing is expected to improve net interest margins in the long term, potentially offsetting temporary impacts on earnings due to the reduction in upfront funding commissions.

FleetPartners Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FleetPartners Group's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.2% today to 8.2% in 3 years time.
• Analysts expect earnings to reach A$71.5 million (and earnings per share of A$0.35) by about January 2028, down from A$77.9 million today. The analysts are largely in agreement about this estimate.
• 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, up from 8.4x today. This future PE is greater than the current PE for the AU Consumer Finance industry at 11.9x.
• Analysts expect the number of shares outstanding to decline by 3.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.21%, as per the Simply Wall St company report.

FleetPartners Group Future Earnings Per Share Growth

Risks

• The expected decline in used car prices is seen as a significant headwind, potentially impacting net margins and profitability.
  
• The increase in provisions due to the growing balance sheet funded novated leases could strain earnings and impact financial stability.
  
• The funding transition from P&A to balance sheet funding, although providing long-term benefits, creates temporary challenges and short-term headwinds, potentially affecting net interest margins and earnings.
  
• The complexity and delay in the Accelerate program's go-live could incur higher costs than planned over the long term, impacting net margins.
  
• Economic uncertainties in markets like New Zealand, including election impacts and deteriorating conditions for small businesses, could hinder revenue growth and overall financial performance.

Valuation

• The analysts have a consensus price target of A$3.72 for FleetPartners 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$876.7 million, earnings will come to A$71.5 million, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of A$2.86, the analyst's price target of A$3.72 is 23.0% 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.