AI Lending And Automation Will Drive Powerful Long Term Expansion

Catalysts

About Harmoney

Harmoney is a 100 percent online consumer direct lender using data and automation to provide fast, personalized personal and auto finance in Australia and New Zealand.

What are the underlying business or industry changes driving this perspective?

• Full deployment of Stellare 2.0 across both Australia and New Zealand is reported to be lifting approval rates and new customer originations, which the company believes can support sustained loan book expansion and higher revenue growth over the next several years.
• Rising adoption of digital, broker free borrowing and the shift to direct online channels aligns with Harmoney's model, supporting structurally lower acquisition costs and ongoing improvement in net margins and earnings.
• Continual enhancement of AI driven credit and marketing models, powered by over a decade of first party data and more than 10,000 new applicants each month, is intended to keep risk adjusted income high while aiming to reduce credit losses and support net profit.
• Expansion into secured auto loans and a new revolving product is intended to unlock larger wallet share within an A150 billion consumer lending market, diversifying volumes and supporting revenue and earnings growth beyond the core unsecured book.
• Automation driven operating leverage, evidenced by a 19 percent cost to income ratio and minimal incremental staffing needs as the book scales, positions Harmoney to potentially convert incremental revenue into higher net margins and cash NPAT.

Assumptions

This narrative explores a more optimistic perspective on Harmoney compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Harmoney's revenue will grow by 68.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 12.5% today to 11.5% in 3 years time.
• The bullish analysts expect earnings to reach A$23.9 million (and earnings per share of A$0.14) by about December 2028, up from A$5.5 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$15.3 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 17.3x on those 2028 earnings, up from 14.3x today. This future PE is greater than the current PE for the AU Consumer Finance industry at 10.7x.
• The bullish analysts expect the number of shares outstanding to grow by 1.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.72%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Harmoney's strategy is heavily dependent on Stellare 2.0, AI models and digital marketing platforms such as Google, Microsoft Ads and Facebook. Any long term deterioration in digital advertising economics, changes to data privacy rules or algorithm changes that make high intent customer acquisition more expensive could erode its structurally low acquisition costs, reducing revenue growth and compressing net margins.
• The model assumes that first party data and automation will sustainably keep credit losses within the 3.7% range and risk adjusted income around 5.7%. A prolonged period of household stress in Australia or New Zealand, or miscalibration of AI credit models as the company pushes into new products and customer segments, could lift arrears and loss rates, weakening risk adjusted income and earnings.
• The long term growth story relies on repeat borrowing, with management highlighting that existing customers on average take out an additional 150% of their initial loan amount at near zero acquisition cost. However, shifts in consumer behaviour, increased competition from banks and fintechs or regulatory tightening around consumer lending could reduce repeat usage rates and loan volumes, pressuring revenue and the scalability of net margins.
• Harmoney plans to expand into secured auto loans and a revolving product to tap a larger share of the A150 billion consumer lending market. Execution risk in new product design, technology build, funding structures and risk management, along with potential regulatory scrutiny of new credit products, could delay scale or introduce higher credit losses, undermining the expected uplift in revenue and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Harmoney is A$2.74, which represents up to two standard deviations above the consensus price target of A$2.22. This valuation is based on what can be assumed as the expectations of Harmoney's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$2.74, and the most bearish reporting a price target of just A$1.33.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be A$208.7 million, earnings will come to A$23.9 million, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 11.7%.
  
• Given the current share price of A$0.76, the analyst price target of A$2.74 is 72.2% 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.