Westpac Portfolio Integration And Digital Transformation Will Drive Future Profitability

Key Takeaways

• Strategic acquisitions and automation initiatives are driving Resimac's growth, efficiency, and revenue, enhancing overall financial performance.
  
• Successful loan campaigns and favorable interest rate conditions are boosting application volumes and net interest margins, improving profitability.
  
• Economic pressures and rising delinquencies could impact Resimac's earnings, with operational risks from portfolio integration and lower interest margins affecting profitability.

Catalysts

Provides residential mortgage and asset finance lending products in Australia and New Zealand.

• The strategic acquisition and integration of the Westpac auto portfolio, adding approximately $1.5 billion in AUM, supports Resimac's growth and diversification objectives into novated lease and consumer segments, expected to increase operating profit by $6 million in FY '25 and $12 million in FY '26. This will directly impact earnings and revenue growth.
  
• Resimac's focus on automation and digital transformation initiatives, including the deployment of AI tools, aims to increase efficiency, reduce operating costs, and improve processing times for loan applications, thereby positively impacting net margins and overall financial performance.
  
• The successful execution of home loan campaigns, resulting in a 48% increase in application volumes and the revitalization of broker activity, is expected to boost settlement volumes and ultimately drive AUM growth, leading to higher revenue.
  
• The reduction of cash rates in 2025 and anticipated further rate cuts are expected to benefit Resimac’s net interest margin, enhancing profitability and providing favorable conditions for reduced funding costs.
  
• Resimac's disciplined cost management and improvements in settlement volumes have led to a 20% increase in operating profit before impairments and tax, demonstrating positive impacts on operating efficiency and potentially increasing future earnings.

Resimac Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Resimac Group's revenue will grow by 123.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 20.9% today to 5.6% in 3 years time.
• Analysts expect earnings to reach A$83.4 million (and earnings per share of A$0.21) by about April 2028, up from A$27.9 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 5.9x on those 2028 earnings, down from 12.1x today. This future PE is lower than the current PE for the AU Diversified Financial industry at 15.8x.
• 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 7.1%, as per the Simply Wall St company report.

Resimac Group Future Earnings Per Share Growth

Risks

• The Australian economy is experiencing pressures such as a slowdown in growth, rising insolvencies, low disposable incomes, and elevated cash rates, which could adversely impact Resimac's revenue and net income.
  
• Resimac's increase in asset finance delinquencies and impairment expenses, particularly with recent write-offs in equipment and passenger vehicle assets, suggests rising credit risk, which could impact earnings and net margins.
  
• The migration and integration of the Westpac auto portfolio presents operational risks, potentially impacting short-term profitability if not managed smoothly and efficiently.
  
• Continued economic challenges and the broadening of financial hardship definitions could increase the provisions for home loans, affecting net margins and earnings.
  
• The lower net interest margins (NIM) in home loans and asset finance, influenced by changes in product mix and increased borrowing costs, could lead to pressure on profit margins and overall profitability.

Valuation

• The analysts have a consensus price target of A$1.012 for Resimac 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$1.5 billion, earnings will come to A$83.4 million, and it would be trading on a PE ratio of 5.9x, assuming you use a discount rate of 7.1%.
• Given the current share price of A$0.85, the analyst price target of A$1.01 is 16.0% 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.