Technology Investments Will Improve Future Operational Efficiencies

Key Takeaways

• Anticipated growth in mortgage fundings and securitization investment is expected to drive revenue and stabilize earnings.
  
• Investments in technology and infrastructure may improve operational efficiency and enhance future net margins.
  
• Increased competition, heightened costs, and delayed revenue recognition due to securitization and declining placement fees may negatively impact growth and margins.

Catalysts

First National Financial Corporation, together with its subsidiaries, originates, underwrites, and services commercial and residential mortgages in Canada.

• Expectation of year-over-year increases in single-family mortgage fundings in the next two quarters, supported by higher commitment levels and forecasts for growth in the housing market in 2025. This is likely to positively impact revenue and future earnings.
  
• Continued investment in securitization is anticipated to result in higher future net interest income, contributing to revenue growth and earnings stability.
  
• Third-party underwriting business is expected to grow, leveraging First National's platform and MERLIN technology, providing diversification of revenue and enhancing earnings stability.
  
• Renewal of higher volumes from 2020 mortgage vintages is prioritized, which could improve revenue from placement fees and enhance net margins due to reduced broker fee expenses.
  
• Elevated technology and infrastructure investment in 2024 aimed at future business growth could lead to improved operational efficiencies and potentially boost net margins and earnings in subsequent years once major replatforming initiatives are complete.

First National Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First National Financial's revenue will grow by 18.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 29.2% today to 25.9% in 3 years time.
• Analysts expect earnings to reach CA$294.7 million (and earnings per share of CA$4.92) by about March 2028, up from CA$199.5 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 10.7x on those 2028 earnings, down from 11.8x today. This future PE is lower than the current PE for the CA Diversified Financial industry at 11.2x.
• 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 6.93%, as per the Simply Wall St company report.

First National Financial Future Earnings Per Share Growth

Risks

• The notable shift towards securitization, where nearly all additional $2.1 billion was funded through this method, delays revenue recognition, impacting immediate and near-term earnings adversely.
  
• Increased competition in the broker channel following the reentry of a traditionally large lender has lowered First National's market share, potentially affecting revenue growth and net margins.
  
• Elevated operating costs due to significant ongoing investments in technology could continue to reduce net margins if these expenses do not translate into sufficient incremental revenue or cost savings.
  
• The CMHC's more cautious approach to underwriting may limit future growth in mortgage originations, affecting future revenue streams.
  
• Changes in funding spreads, with deferred placement fees declining by 57%, may negatively impact revenue and earnings if this trend persists, particularly in a competitive rate environment.

Valuation

• The analysts have a consensus price target of CA$43.8 for First National Financial 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 CA$1.1 billion, earnings will come to CA$294.7 million, and it would be trading on a PE ratio of 10.7x, assuming you use a discount rate of 6.9%.
• Given the current share price of CA$39.41, the analyst price target of CA$43.8 is 10.0% 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.