Emerging Residential Development In Australia Will Unlock Long-Term Opportunities

Key Takeaways

• Growth in fee-earning FUM and residential development cycles could boost revenue and support long-term earnings growth.
  
• Strong market positioning in private credit and strategic partnerships are likely to enhance earnings stability and margins.
  
• Heavy reliance on residential sector and rising costs pose financial risks, while unrecognized fees and increased competition further challenge revenue and profitability.

Catalysts

Qualitas is a real estate investment firm which focuses on direct investment in all real estate classes and geographies, acquisitions and restructuring of distressed debt, third party capital raisings and consulting services.

• Strong fee-earning FUM growth, which increased by 41%, is expected to continue driving base management fee growth. This is likely to result in increased revenue for the company.
  
• A beginning residential development cycle in Australia offers a substantial opportunity for increased deployment, potentially boosting revenue and supporting long-term earnings growth as more projects are financed.
  
• The increase in the unrecognized performance fee pool by 20%, primarily from credit funds, indicates future growth in performance fees, contributing to higher earnings as these fees are realized.
  
• Organic and inorganic growth strategies focusing on FUM duration and asset diversity may lead to margin accretion and increased earnings stability, driven by larger mandates and enhanced strategic partnerships.
  
• A robust market positioning as an incumbent CRE alternative financier in Australia positions the company for long-term growth in the rapidly expanding private credit market, likely impacting revenue positively.

Qualitas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Qualitas's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 28.5% today to 42.6% in 3 years time.
• Analysts expect earnings to reach A$59.8 million (and earnings per share of A$0.2) by about September 2028, up from A$33.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.4x on those 2028 earnings, down from 32.2x today. This future PE is greater than the current PE for the AU Capital Markets industry at 21.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.67%, as per the Simply Wall St company report.

Qualitas Future Earnings Per Share Growth

Risks

• The challenging deployment environment over the past three years due to factors such as COVID-19 impacts and rising construction costs could hinder future revenue growth if similar disruptions continue to affect project feasibilities and delay development cycles.
  
• The current reliance on residential sector investments, which make up 85% of total deployment, presents concentration risk. Any downturn or instability in the residential market could adversely affect revenue and margins.
  
• The significant amount of unrecognized performance fees, while indicating future potential, introduces uncertainty to earnings as their realization is contingent on market conditions and investment performance.
  
• Increased corporate costs, reported as 22% higher than the previous corresponding period, could pressure net margins and affect overall profitability if not offset by corresponding revenue growth.
  
• Greater competition in the small ticket lending market, leading to a decline in total loans outstanding for the Arch Finance business, reflects ongoing challenges in maintaining market share and generating consistent income from this segment.

Valuation

• The analysts have a consensus price target of A$4.161 for Qualitas 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$140.6 million, earnings will come to A$59.8 million, and it would be trading on a PE ratio of 25.4x, assuming you use a discount rate of 7.7%.
• Given the current share price of A$3.67, the analyst price target of A$4.16 is 11.8% 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.