Despite Margin Pressures And Competition, Diversification May Improve Future Prospects

Key Takeaways

• Diversification into new business areas like crypto assets and pension savings could drive revenue growth but may require significant initial investment impacting net earnings.
  
• New regulatory frameworks could increase compliance costs, impacting margins, while transitioning high-risk offerings might reduce top-line revenue growth.
  
• Leonteq's strategic focus on expanding diverse revenue streams and optimizing capital structure indicates potential for sustained growth and improved shareholder value despite market challenges.

Catalysts

Provides derivative investment products and services in Switzerland, Europe, and Asia, and internationally.

• Increased competition and margin compression in Leonteq’s traditional business lines due to low volatility levels and pressure on pricing for certain structured products are expected to continue, which could impact future net margins negatively.
  
• The ongoing and upcoming diversification into new business initiatives, such as the EMC platform, crypto assets, pension savings, and retail flow business, are expected to further grow revenues. However, as these areas mature, they might require substantial upfront investment that could initially pressure net earnings.
  
• The implementation of the new regulatory framework, including capital and large exposure requirements, may lead to increased costs associated with compliance, potentially affecting the company's net margins and overall profitability.
  
• Leonteq plans to transition certain high-risk offerings to a lighter balance approach, potentially reducing platform turnover as risky, but profitable, products are scaled back, which could impact top-line revenue growth.
  
• Uncertainty surrounding the impact of changes in interest rates on structured product attractiveness and fee income could slow down the anticipated rebound in revenue growth if not offset by improvement in market conditions.

Leonteq Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Leonteq's revenue will grow by 12.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 20.9% in 3 years time.
• Analysts expect earnings to reach CHF 70.8 million (and earnings per share of CHF 3.98) by about February 2028, up from CHF 5.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CHF85.2 million in earnings, and the most bearish expecting CHF56.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 4.6x on those 2028 earnings, down from 59.2x today. This future PE is lower than the current PE for the GB Capital Markets industry at 16.4x.
• Analysts expect the number of shares outstanding to decline by 0.93% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.18%, as per the Simply Wall St company report.

Leonteq Future Earnings Per Share Growth

Risks

• Leonteq has experienced strong growth in platform activities, including a 40% increase in client transactions, suggesting potential revenue growth from increased volumes despite market challenges. [Revenue]
  
• The new business initiatives, such as fund derivatives and crypto offerings, have shown double-digit growth rates, indicating potential for expanding revenue streams and improving earnings diversification. [Revenue]
  
• The expansion of Leonteq's white-label partners and an overall 22% growth in revenue from new business initiatives demonstrate a solid strategy to diversify and stabilize revenue, likely aiding in maintaining or enhancing net margins. [Net Margins]
  
• With the introduction of a new regulatory regime, Leonteq can issue hybrid capital, potentially optimizing its capital structure and enhancing shareholder value, which could positively impact net margins and returns. [Net Margins]
  
• Leonteq's strategic focus on balance sheet light businesses and market share growth, especially in the Swiss market, suggests a resilience and ability to navigate challenging environments, which may sustain or increase earnings over time. [Earnings]

Valuation

• The analysts have a consensus price target of CHF17.0 for Leonteq 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 CHF339.4 million, earnings will come to CHF70.8 million, and it would be trading on a PE ratio of 4.6x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of CHF19.8, the analyst price target of CHF17.0 is 16.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.