Business Transformation And Cloud Transition Expected To Improve Operational Efficiency By FY '26

Key Takeaways

• Strategic execution and cloud transition aim to enhance efficiency, flexibility, and net margins, bolstering overall earnings.
  
• Share buybacks and business transformation efforts reflect confidence, potentially boosting EPS and driving revenue growth.
  
• ClearView's decrease in NPAT, substantial claims loss, and increased lapse rates challenge profitability, while strategic repricing and share buyback may affect customer affordability and investor sentiment.

Catalysts

Engages in life insurance business in Australia.

• ClearView's strategic execution and business simplification efforts, including the transition to a cloud-based platform, are expected to improve operational efficiency and flexibility, potentially enhancing net margins and earnings.
  
• The completion of a business transformation program by FY '26 is anticipated to lead to efficiency gains, which could positively impact net margins and overall earnings.
  
• The planned share buyback of up to 10% of the share capital could increase earnings per share (EPS) by reducing the number of shares outstanding, indicating management's confidence in the company's undervaluation relative to its embedded value.
  
• ClearView's goal of achieving a 12% to 14% market share of new business by FY '26, supported by strong adviser support and a refined ClearChoice product, is expected to drive revenue growth.
  
• The adjustment of gross premium targets and effective retention strategies, coupled with repricing activities, indicate a focus on maintaining premium income growth, which positively impacts revenue.

ClearView Wealth Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ClearView Wealth's revenue will grow by 10.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.9% today to 9.3% in 3 years time.
• Analysts expect earnings to reach A$49.0 million (and earnings per share of A$0.07) by about August 2028, up from A$15.3 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$34.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.4x on those 2028 earnings, down from 19.2x today. This future PE is lower than the current PE for the AU Insurance industry at 20.8x.
• Analysts expect the number of shares outstanding to grow by 1.04% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.58%, as per the Simply Wall St company report.

ClearView Wealth Future Earnings Per Share Growth

Risks

• ClearView experienced a significant decrease in NPAT, with a 22% drop in life insurance NPAT and a 28% drop in group underlying NPAT, which could impact their overall earnings and profitability.
  
• A substantial claims loss of $6.2 million in the first quarter indicates potential volatility in claims experience, which may negatively impact net margins if such incidents recur.
  
• The company faces increased lapse rates due to high interest rates and cost-of-living pressures, potentially affecting revenue stability and challenging retention efforts.
  
• ClearView's strategy involves repricing their LifeSolutions portfolio, which could lead to further affordability concerns among customers and affect revenue if not managed effectively.
  
• Intention to conduct a share buyback instead of issuing dividends could impact investor sentiment and may indicate concerns surrounding capital allocation and return on investment.

Valuation

• The analysts have a consensus price target of A$0.762 for ClearView Wealth based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$0.84, and the most bearish reporting a price target of just A$0.68.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$527.2 million, earnings will come to A$49.0 million, and it would be trading on a PE ratio of 12.4x, assuming you use a discount rate of 6.6%.
• Given the current share price of A$0.46, the analyst price target of A$0.76 is 39.7% 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.