Reliance On Asset Sales Will Lead To Volatile Revenues And Lower Earnings

Key Takeaways

• Asset sales strategy may lead to volatile revenue streams and impact long-term growth due to reliance on non-repeatable transactions.
  
• Uncertainty in asset sales and regulatory approvals could disrupt cash flow, affecting future revenue and earnings stability.
  
• Operating expense reductions, asset sales with attractive valuations, stock buybacks, and revenue growth demonstrate Pacific Current Group's strong financial health and earnings potential.

Catalysts

Engages in multi-boutique asset management business worldwide.

• The anticipated reduction in operating expenses by more than 40% due to the sale of assets and externalization of investment management may not translate into proportional savings if unexpected costs arise, potentially impacting net margins.
  
• The reliance on asset sales to generate cash and maintain profitability, rather than organic growth, could lead to volatile revenue streams and future earnings as these transactions may not be repeatable.
  
• The restructuring and sale of multiple significant assets may lead to a reduced revenue base in FY '25, altering future revenue streams and potentially leading to a decline in overall earnings.
  
• The ongoing uncertainty regarding the completion and timing of future asset sales and regulatory approvals may disrupt cash flow and impact future revenue and earnings.
  
• Future strategic decisions, such as returning capital to shareholders through buybacks, could lead to a temporary boost in EPS but may not contribute to long-term earnings growth if reinvestment in growth opportunities is limited.

Pacific Current Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pacific Current Group's revenue will decrease by 48.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 52.7% today to 89.1% in 3 years time.
• Analysts expect earnings to reach A$26.2 million (and earnings per share of A$0.64) by about February 2028, down from A$110.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$30.2 million in earnings, and the most bearish expecting A$22.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.5x on those 2028 earnings, up from 5.6x today. This future PE is greater than the current PE for the AU Capital Markets industry at 21.9x.
• Analysts expect the number of shares outstanding to grow by 1.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.4%, as per the Simply Wall St company report.

Pacific Current Group Future Earnings Per Share Growth

Risks

• Pacific Current Group achieved significant reductions in ongoing operating expenses by externalizing investment management and successfully selling assets, which can lead to improved net margins and profitability.
  
• The sale of a stake in Carlisle Management Company, expected to yield a fair value uplift, highlights the company's ability to achieve attractive valuations in their transactions, positively impacting earnings.
  
• PAC's ongoing stock buyback plan indicates strong financial health and capital flexibility, which could support share price stability by effectively deploying the cash surplus.
  
• The diversified asset sales strategy and attractive transaction prices suggest a strong ability to unlock value from investments, potentially resulting in favorable revenue streams.
  
• The increase in management fee revenues and a 24% growth in underlying NPAT reflect a solid operational performance, suggesting resilience and potential for earnings growth.

Valuation

• The analysts have a consensus price target of A$12.7 for Pacific Current 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$29.4 million, earnings will come to A$26.2 million, and it would be trading on a PE ratio of 32.5x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of A$11.78, the analyst price target of A$12.7 is 7.2% 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.