Technology Investments And Business Diversification Will Strengthen Future Performance

Key Takeaways

• Investment in technology and strategic debt management is expected to improve productivity, enhance customer experience, and boost financial health.
  
• Diversification through a new commercial lending unit and credit quality improvements are anticipated to drive revenue growth and profitability.
  
• Ongoing legal challenges and economic uncertainties might impact earnings and investor confidence, while transition efforts could disrupt short-term profitability and revenue.

Catalysts

Provides automotive finance in Australia and New Zealand.

• Solvar's investment in technology, including IT platform consolidation and cybersecurity enhancements, is expected to increase productivity and enhance customer experiences, positively impacting future revenue and net margins.
  
• The introduction of a dedicated commercial lending business unit is anticipated to diversify Solvar's earnings base, potentially driving revenue growth in FY '26 and beyond.
  
• The consolidation of funding partners and the introduction of mezzanine financing for Money3 are expected to support loan book growth and reduce cost of capital, thereby aiding net margins and overall earnings.
  
• Solvar's focus on improving credit quality by attracting higher-quality customers and its initiatives to reduce bad debt provisions are likely to enhance net margins and profitability.
  
• Solvar's strategic move to pay down high-cost debt in New Zealand and repurpose free cash flows is expected to improve net margins and boost financial health, contributing positively to future earnings.

Solvar Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Solvar's revenue will grow by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.7% today to 19.3% in 3 years time.
• Analysts expect earnings to reach A$44.8 million (and earnings per share of A$0.19) by about July 2028, up from A$20.7 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 9.4x on those 2028 earnings, down from 14.8x today. This future PE is lower than the current PE for the AU Consumer Finance industry at 12.6x.
• Analysts expect the number of shares outstanding to decline by 2.73% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.23%, as per the Simply Wall St company report.

Solvar Future Earnings Per Share Growth

Risks

• The ongoing federal court case and regulatory scrutiny by ASIC could result in significant legal expenses and potential penalties, impacting net margins and overall earnings stability.
  
• The consolidation efforts and technology platform updates might cause temporary disruptions and increased costs, which could negatively affect short-term revenue growth and operating margins.
  
• The rundown and subsequent decreased contribution from the New Zealand operations could reduce overall revenue streams and slow down earnings growth in the near term.
  
• The transition to higher credit quality customers, while improving long-term credit quality, might lead to a decrease in interest income margin, affecting short-term revenue and profitability.
  
• Economic uncertainties, such as a potential election-related slowdown and geopolitical risks affecting interest rates, could create unpredictability in revenue and profit forecasts, impacting investor confidence and share price stability.

Valuation

• The analysts have a consensus price target of A$1.717 for Solvar 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$231.5 million, earnings will come to A$44.8 million, and it would be trading on a PE ratio of 9.4x, assuming you use a discount rate of 11.2%.
• Given the current share price of A$1.58, the analyst price target of A$1.72 is 8.0% 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.