Investments In AI And Ancala Acquisition Will Support Future Earnings Through Operational Efficiencies And Stable Cash Flows

Key Takeaways

• In-sourcing U.S. fund distribution and infrastructure acquisitions aim to enhance control, revenue, and stable cash flows.
  
• Efficiency programs and strategic investments in AI and hiring aim to boost margins, operational efficiency, and future earnings.
  
• Increased foreign exchange volatility, emerging market outflows, high reliance on trading activity, and elevated tax rates may negatively impact Vontobel's profit margins.

Catalysts

Provides various financial services to private and institutional clients in Switzerland, Germany, the United Kingdom, Italy, North America, Liechtenstein, Singapore, Hong Kong, Australia, and Japan.

• The strategic decision to own and in-source the distribution of 40 Act funds in the U.S. is expected to enhance control over distribution channels, potentially leading to increased revenues and improved margins through better cost management.
  
• Significant acquisitions such as Ancala, which provides access to private infrastructure investment opportunities, are anticipated to drive future revenue growth by participating directly in the value chain with stable cash flows and inflation protection.
  
• The successful execution of a CHF 100 million efficiency program is expected to enhance net margins by reducing the cost-to-income ratio, as evidenced by a 5% improvement to below 75% in 2024.
  
• With positive net inflows of CHF 4.6 billion and a significant focus on private and institutional clients, Vontobel's targeted growth through its private client segment suggests potential for future revenue enhancement, especially given strong performance in core markets.
  
• Planned strategic initiatives, including investment in smart technology and AI, alongside the continued hiring of relationship managers, are anticipated to boost future earnings by supporting improved customer service and operational efficiencies.

Vontobel Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vontobel Holding's revenue will grow by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.7% today to 24.5% in 3 years time.
• Analysts expect earnings to reach CHF 374.4 million (and earnings per share of CHF 6.61) by about April 2028, up from CHF 266.1 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 11.2x on those 2028 earnings, down from 12.2x today. This future PE is lower than the current PE for the GB Capital Markets industry at 13.6x.
• Analysts expect the number of shares outstanding to decline by 0.99% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.63%, as per the Simply Wall St company report.

Vontobel Holding Future Earnings Per Share Growth

Risks

• Increased foreign exchange volatility and a strengthening Swiss franc could negatively impact Vontobel's profits due to lower net margins from foreign transactions.
  
• The high reliance on structured solutions and client trading activity could lead to revenue volatility if market conditions change or if client activity decreases.
  
• Emerging market investments are still experiencing outflows, which could affect revenue growth if these segments do not recover as anticipated.
  
• Elevated tax rates driven by global minimum tax regulations and changing tax regimes in key markets could impact net earnings and reduce profit margins.
  
• Ongoing execution risks associated with strategic initiatives, such as acquisitions and efficiency programs, could lead to increased costs or operational challenges, impacting net margins and overall profitability.

Valuation

• The analysts have a consensus price target of CHF62.325 for Vontobel Holding 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 CHF70.0, and the most bearish reporting a price target of just CHF56.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CHF1.5 billion, earnings will come to CHF374.4 million, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 7.6%.
• Given the current share price of CHF58.1, the analyst price target of CHF62.32 is 6.8% 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.