Digital Excellence Program Will Increase Cost Efficiency Over Long Term

Key Takeaways

• Grenke's strong market confidence and funding bolster growth, aided by interest rate cuts and robust leasing activity.
  
• Digital excellence initiatives aim to enhance cost efficiency, potentially boosting long-term margins and EPS through strategic acquisitions.
  
• Increasing insolvencies and debt challenges across key markets are impacting Grenke's financial stability, credit provisions, and growth opportunities.

Catalysts

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

• The company has seen a normalization of its loss rate to a historical average of 1.5%, after experiencing unusually low rates. This suggests improved risk provisioning modeling going forward which can stabilize earnings despite economic uncertainties.
  
• Grenke is experiencing robust growth in leasing new business, with a target of generating more than €3 billion this year, fueled by favorable interest rate cuts from central banks, expected to positively impact revenue growth.
  
• The successful issuance of a €500 million benchmark bond reflects strong market confidence and enhances Grenke's funding base, likely supporting future business expansion and revenue generation.
  
• The implementation of a digital excellence program is expected to increase cost efficiency over the long term, with a cost-income ratio target below 58%, thereby potentially improving net margins.
  
• Grenke’s acquisition efforts, such as the share buyback program resulting in ownership of roughly 5% of its own shares, could drive an increase in the stock’s earnings per share (EPS) as these shares might be cancelled or used strategically in the future.

Grenke Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Grenke's revenue will grow by 14.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.1% today to 22.4% in 3 years time.
• Analysts expect earnings to reach €178.5 million (and earnings per share of €2.89) by about February 2028, up from €74.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.5x on those 2028 earnings, down from 9.9x today. This future PE is lower than the current PE for the GB Diversified Financial industry at 12.4x.
• Analysts expect the number of shares outstanding to decline by 4.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.78%, as per the Simply Wall St company report.

Grenke Future Earnings Per Share Growth

Risks

• The increase in insolvencies across core markets like France, Spain, and Germany has impacted Grenke's provisioning for bad debts, indicating a potential rise in expected credit losses and affecting net earnings.
  
• The impairment and complete write-off of the Spanish subsidiary's goodwill reflect poor performance, leading to higher costs and reduced net margins.
  
• The decline in group earnings due to higher settlement claims and risk provisions poses a risk to expected profitability, impacting net earnings.
  
• Modest recovery performance and unexpectedly high defaults in Grenke's bad debt portfolio can lead to increased non-performing loans, affecting revenue and profit.
  
• The recent bond issuance, while improving liquidity, has lowered the equity ratio, which might limit future growth opportunities or necessitate capital measures, impacting financial stability and earnings.

Valuation

• The analysts have a consensus price target of €26.46 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 €42.0, and the most bearish reporting a price target of just €18.3.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €796.0 million, earnings will come to €178.5 million, and it would be trading on a PE ratio of 6.5x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of €16.62, the analyst price target of €26.46 is 37.2% 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.