Introducing Self-Managed Super Fund Mortgages And Sharia Lending Will Drive Future Mortgage Originations

Key Takeaways

• New product introductions and successful implementations are set to drive revenue growth and mortgage originations, enhancing market presence and financial performance.
  
• A focus on low-risk customers and whole loan sales is expected to improve margins and earnings, with favorable conditions for market expansion predicted.
  
• Economic pressures and competition are impacting Pepper Money's asset finance and mortgage segments, leading to decreased revenue and strained margins.

Catalysts

Operates as a non-bank lender in the mortgage and asset finance markets in Australia and New Zealand.

• Pepper Money's focus on introducing new products, such as the self-managed super fund mortgage and Sharia lending, is expected to drive future mortgage originations, positively impacting revenue growth.
  
• The successful implementation of the Pepper Product Selector (PPS) with mortgage aggregators has shown significant volume growth, suggesting further revenue increases as it expands to additional aggregators.
  
• The shift towards originating loans primarily for low credit risk Tier A customers, particularly in Asset Finance, is anticipated to enhance net interest margins and reduce the risk of defaults, supporting higher earnings.
  
• The continuation of whole loan sales provides a capital-light income stream while allowing Pepper Money to optimize its balance sheet and recycle capital, which is expected to improve their net margins.
  
• Anticipated interest rate reductions provide a positive outlook for market expansion, specifically in mortgages, which could lead to increased originations and subsequently higher revenues.

Pepper Money Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pepper Money's revenue will grow by 10.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 25.5% today to 23.6% in 3 years time.
• Analysts expect earnings to reach A$124.0 million (and earnings per share of A$0.26) by about March 2028, up from A$98.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$152.1 million in earnings, and the most bearish expecting A$102.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.0x on those 2028 earnings, up from 6.1x today. This future PE is lower than the current PE for the AU Diversified Financial industry at 16.8x.
• Analysts expect the number of shares outstanding to decline by 0.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.4%, as per the Simply Wall St company report.

Pepper Money Future Earnings Per Share Growth

Risks

• Soft market conditions and cost of living pressures have impacted asset finance originations, leading to a decrease in revenue from this segment.
  
• Elevated late-stage arrears and increased insolvencies have led to increased loss expenses in asset finance, negatively impacting net margins.
  
• High attrition in the New Zealand mortgage portfolio, particularly following interest rate changes, affects the revenue base and reduces net interest income.
  
• Competition in the asset finance industry remains intense, which could pressure both margins and growth potential.
  
• Economic uncertainty and inflationary pressures could continue to impact consumer confidence and demand, potentially affecting future revenue and earnings growth.

Valuation

• The analysts have a consensus price target of A$1.656 for Pepper Money 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$524.9 million, earnings will come to A$124.0 million, and it would be trading on a PE ratio of 8.0x, assuming you use a discount rate of 11.4%.
• Given the current share price of A$1.36, the analyst price target of A$1.66 is 17.9% 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.