Rising Digital Competition And Regulatory Scrutiny Will Challenge Automation Yet Long-Term Prospects Remain Promising

Catalysts

About Harmoney

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

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

• Although Stellare 2.0 is now driving higher approval rates and new customer originations across both Australia and New Zealand, execution risk around scaling originations without a corresponding rise in credit losses could cap the benefit to future revenue growth and compress risk-adjusted income.
• Despite a large underpenetrated addressable market in online consumer lending, intensifying competition in digital acquisition channels and potential changes in search and ad-tech economics could lift customer acquisition costs and erode net margins over time.
• While the planned expansion into secured auto and revolving products broadens the product set, slower than expected uptake or operational complexity in launching and funding these products could delay the anticipated diversification of revenue and earnings.
• Although Harmoney’s automation and AI driven underwriting are currently supporting a low cost-to-income ratio, maintaining this efficiency as regulatory scrutiny on AI decisioning and responsible lending increases may require higher compliance and technology spend, dampening operating leverage and earnings growth.
• While the recurring borrowing behavior of existing customers and the shift toward an always on mobile app experience support higher customer lifetime value, any misstep in loyalty execution or app engagement could mean repeat lending volumes fall short of expectations, limiting growth in revenue and cash NPAT.

Assumptions

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

• The bearish analysts are assuming Harmoney's revenue will grow by 60.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 12.5% today to 8.6% in 3 years time.
• The bearish analysts expect earnings to reach A$15.5 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 bullish ones expecting earnings as high as A$24.2 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.1x on those 2028 earnings, down from 16.5x today. This future PE is greater than the current PE for the AU Consumer Finance industry at 10.4x.
• The bearish 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 rapid loan book expansion, driven by Stellare 2.0 and planned auto and revolving products, may outpace its demonstrated credit performance. This could lead to higher arrears and credit losses over time, which would weaken risk adjusted income and compress net margins.
• The company’s heavy reliance on digital marketing partnerships with platforms such as Google, Microsoft Ads and Facebook leaves it exposed to structural changes in ad-tech economics or privacy regulation. These changes could raise acquisition costs and reduce conversion efficiency, eroding revenue growth and net margins.
• As AI driven underwriting and agentic lending become more central to the business model, increased regulatory scrutiny of automated credit decisioning in Australia and New Zealand could force Harmoney to slow approvals or invest significantly more in compliance and technology. This would lift operating expenses and dilute earnings growth.
• The strategy to deepen customer retention via loyalty programs, a mobile app and revolving limits assumes repeat borrowing remains strong. Weaker consumer confidence or greater competition from other digital lenders could reduce repeat usage, lowering expected customer lifetime value, revenue and ultimately earnings.
• Harmoney’s concentration in Australia and New Zealand and dependence on warehouse funding from major banks means any cyclical downturn in household credit demand or a shift in bank risk appetite could constrain available funding and pressure loan pricing. This could limit loan book growth, reduce net interest margin and slow earnings.

Valuation

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

• The assumed bearish price target for Harmoney is A$1.33, which represents up to two standard deviations below 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 more bearish 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 bearish analyst cohort, you'd need to believe that by 2028, revenues will be A$180.3 million, earnings will come to A$15.5 million, and it would be trading on a PE ratio of 13.1x, assuming you use a discount rate of 11.7%.
  
• Given the current share price of A$0.88, the analyst price target of A$1.33 is 34.1% 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.