Digital Excellence And Leasing Expansion Will Strengthen Future Prospects

Key Takeaways

• Strategic focus on leasing and cost management initiatives aims to enhance revenue, profit growth, and net margins through improved efficiencies.
  
• Divestment from factoring to focus on leasing strengthens operations, while stable loss rates and funding support future earnings and EPS growth.
  
• Rising insolvencies, competition, and increased costs pose financial and operational challenges, potentially limiting Grenke's revenue growth and scalability amidst a tense macroeconomic environment.

Catalysts

Provides financial services to small and medium-sized (SME) enterprises in Germany, France, Italy, and internationally.

• Grenke's focus on strengthening its leasing business by surpassing the €3 billion threshold for the first time, setting the foundation for sustainable earnings growth, is expected to drive future revenue and profit growth.
  
• The company's efforts in cost management and digitalization, including their Digital Excellence program, aim to improve operating efficiencies and reduce costs, potentially improving net margins.
  
• With a successful issuance of two benchmark bonds and a strong funding position, Grenke is well-equipped to support its continuous growth ambitions, likely enhancing earnings stability and growth.
  
• The strategic decision to divest its factoring business and become a pure-play leasing company can streamline operations and improve focus, positively impacting operating income.
  
• Grenke's risk management strategies and expected normalization of loss rates to 1.5%-1.6% provide a stable outlook for future earnings, with a significant potential for EPS growth as new business matures.

Grenke Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Grenke's revenue will grow by 9.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.3% today to 16.6% in 3 years time.
• Analysts expect earnings to reach €124.3 million (and earnings per share of €2.63) by about April 2028, up from €65.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €157.7 million in earnings, and the most bearish expecting €108 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.7x on those 2028 earnings, down from 9.3x today. This future PE is lower than the current PE for the GB Diversified Financial industry at 12.1x.
• Analysts expect the number of shares outstanding to decline by 4.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.75%, as per the Simply Wall St company report.

Grenke Future Earnings Per Share Growth

Risks

• The company is experiencing a challenging operating environment due to tense business climates and macroeconomic uncertainties, which could impact revenue growth and profit margins.
  
• Rising insolvencies and increased risk provisions have impacted Grenke's earnings, indicating potential financial instability and higher default risks that could affect net margins and future earnings.
  
• The company's cost-income ratio has risen to 59.2%, and increased costs related to inflation and staff expenses could further pressure net margins if not managed properly.
  
• Increased competition and the company's focus on leasing could limit market expansion opportunities, potentially constraining revenue streams and the scalability of its business model.
  
• The company faces execution risks as it implements a digital excellence program and navigates regulatory requirements, which could lead to additional costs and impact profitability if not properly managed.

Valuation

• The analysts have a consensus price target of €21.5 for Grenke 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 €30.0, and the most bearish reporting a price target of just €14.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €749.0 million, earnings will come to €124.3 million, and it would be trading on a PE ratio of 8.7x, assuming you use a discount rate of 9.8%.
• Given the current share price of €13.8, the analyst price target of €21.5 is 35.8% 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.