Cloud Adoption And SME Risks Will Undermine Leasing Demand

Key Takeaways

• Industry shifts toward service-based and digital leasing models threaten Grenke's traditional business and long-term revenue sustainability.
  
• Higher credit risks, regulatory burdens, and digital competition are likely to squeeze margins and hinder overall profitability.
  
• Grenke's growth is driven by digitalization, geographic expansion, resilient demand for leasing, and a strong capital position supporting long-term margins and stability.

Catalysts

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

• As businesses increasingly adopt cloud, SaaS, and subscription-based office solutions instead of traditional equipment, the need for Grenke's core leasing products is likely to shrink, directly threatening future revenue growth and jeopardizing the sustainability of its business model over the long term.
  
• Structural shifts toward everything as a service and shared/rented models among SMEs risk fundamentally undercutting Grenke's addressable market in leasing, setting up a scenario of permanent volume stagnation or decline that would materially pressure both topline growth and recurring net interest income.
  
• Persistently high insolvency and default rates among SME clients-already at 1.9 percent in the first quarter with management only expecting this to normalize gradually-signal a heightened baseline of credit risk, raising the prospect of elevated risk provisions and loss rates that could erode net margins more than anticipated and undermine earnings stability.
  
• Intensifying regulatory requirements for disclosure, cross-border tax, and AML/KYC, along with lingering internal control scrutiny, are driving up overhead costs for compliance and risk management; this is likely to further elevate the cost-income ratio and cap profitability, eroding competitiveness against nimbler fintech-driven competitors.
  
• Margin compression is expected to accelerate as agile digital lenders and incumbent banks roll out automated leasing and embedded finance solutions, making Grenke's traditional leasing proposition less attractive and compressing both deal flow and CM2 profit margins, which will restrict EPS and long-term earnings power.

Grenke Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Grenke compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Grenke's revenue will grow by 1.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 9.1% today to 19.6% in 3 years time.
• The bearish analysts expect earnings to reach €124.0 million (and earnings per share of €2.8) by about July 2028, up from €54.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.2x on those 2028 earnings, down from 15.3x today. This future PE is lower than the current PE for the GB Diversified Financial industry at 11.8x.
• Analysts expect the number of shares outstanding to decline by 2.87% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.93%, as per the Simply Wall St company report.

Grenke Future Earnings Per Share Growth

Risks

• Grenke is demonstrating strong double-digit growth in new leasing business volumes and a consistently high CM2 margin, indicating effective pricing, demand resilience, and potential for sustained revenue and net interest income improvements.
  
• The company's digitalization and automation initiatives, including cloud migration and online sales channel partnerships, are progressing on budget and are expected to enhance operational efficiency, lower cost-to-income ratios, and support long-term margin expansion.
  
• Management emphasizes geographic expansion and the rollout of digital origination platforms across multiple European countries, which increases diversification and opens up new addressable markets, providing greater stability and long-term topline growth.
  
• The ongoing shift among SMEs to flexible leasing and subscription models aligns with Grenke's core offerings, suggesting secular industry trends will support future business volume, recurring revenues, and earnings momentum.
  
• Grenke's capital structure remains robust with a stable equity ratio and efficient refinancing, enabling the company to comfortably fund growth and navigate regulatory requirements, thereby supporting earnings and risk-adjusted returns over the long term.

Valuation

• The assumed bearish price target for Grenke is €14.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Grenke's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• 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 bearish analysts, you'd need to believe that by 2028, revenues will be €631.4 million, earnings will come to €124.0 million, and it would be trading on a PE ratio of 6.2x, assuming you use a discount rate of 9.9%.
  
• Given the current share price of €18.8, the bearish analyst price target of €14.5 is 29.7% 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.