Last Update01 May 25
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
About Solvar- 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
How have these above catalysts been quantified?- 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 May 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 8.6x on those 2028 earnings, down from 15.6x today. This future PE is lower than the current PE for the AU Consumer Finance industry at 10.2x.
- 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 8.04%, as per the Simply Wall St company report.
Solvar Future Earnings Per Share Growth
Risks
What could happen that would invalidate this narrative?- 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
How have all the factors above been brought together to estimate a fair value?- The analysts have a consensus price target of A$1.65 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 8.6x, assuming you use a discount rate of 8.0%.
- Given the current share price of A$1.62, the analyst price target of A$1.65 is 2.1% 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.
How well do narratives help inform your perspective?
Disclaimer
AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.