Launching Sharia Lending And Super Fund Mortgages Will Capture Future Niche Markets

Key Takeaways

• New product launches in niche markets could boost revenue through diversified offerings and capital efficiency.
  
• Strategic shifts in asset finance could enhance credit performance, while increased dividends underscore confidence in financial stability.
  
• Intense competition and market challenges in asset finance and mortgage segments could compress margins, limit growth, and affect profitability amid cost-of-living pressures.

Catalysts

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

• Pepper Money has launched new products such as self-managed super fund mortgages and Sharia lending, which can capture niche markets and potentially increase revenue.
  
• The company's strategy of whole loan sales provides a capital-light annuity-style income, improving funding margins, and can enhance net margins by efficiently utilizing capital.
  
• Pepper Money is leveraging its strong technology platform and real-time credit assessment tools, which can streamline processes and potentially improve earnings by increasing operational efficiency.
  
• The company's focus on growing Tier A customers in asset finance and the strategic shift in origination profile can lead to lower risk and improved credit performance, which favors future net margins.
  
• The increased dividend payout ratio and pending share buybacks signal confidence in capital strength and can lead to improved earnings per share (EPS) by returning capital to shareholders.

Pepper Money Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pepper Money's revenue will grow by 9.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 26.4% today to 24.1% in 3 years time.
• Analysts expect earnings to reach A$126.1 million (and earnings per share of A$0.28) by about February 2028, up from A$104.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.8x on those 2028 earnings, up from 6.5x today. This future PE is lower than the current PE for the AU Diversified Financial industry at 16.6x.
• Analysts expect the number of shares outstanding to grow by 0.41% 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

• Asset finance originations were down 19% due to soft market conditions and ongoing cost of living pressures, which could adversely impact revenue and profit growth in this segment.
  
• The heightened number of insolvencies and increased late-stage arrears, particularly impacting asset finance, could lead to higher loan losses and adversely affect net margins.
  
• The decrease in mortgage lending AUM by 9% year-over-year could indicate challenges in sustaining growth and may limit future earnings potential from this portfolio.
  
• Intense competition in the mortgage market led to soft market conditions, which if persistent, could compress net interest margins and affect profitability.
  
• The practice of whole loan sales, while providing immediate capital, might lead to reduced future revenue streams from forgone net interest income.

Valuation

• The analysts have a consensus price target of A$1.6 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$522.6 million, earnings will come to A$126.1 million, and it would be trading on a PE ratio of 7.8x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of A$1.54, the analyst price target of A$1.6 is 3.7% 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.