Subscription Shift And Fintech Disruption Will Erode Leasing Margins

Key Takeaways

• The rise of digital-first competitors and embedded finance solutions is steadily eroding Grenke's traditional leasing business model and compressing margins.
  
• Regulatory pressures, ESG requirements, and macroeconomic volatility are increasing compliance and risk-related costs, challenging Grenke's ability to scale and sustain profitability.
  
• Improved efficiency, cost controls, diversified funding, and enhanced risk management position Grenke for resilient growth, stronger earnings, and healthier long-term profitability.

Catalysts

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

• The ongoing shift toward a subscription-based as-a-service economy in Europe threatens to structurally reduce demand for traditional leasing products, which directly undermines Grenke's addressable market and could result in declining long-term revenues once contract run-offs accelerate.
  
• Rising digitization and automation within financial services, particularly the adoption of embedded finance and fintech solutions by SMEs, is likely to erode the unique value proposition of Grenke's traditional leasing model, causing a loss of competitive edge and margin compression over the next several years.
  
• Heightened regulatory scrutiny and more stringent ESG requirements across the EU threaten to drive up compliance and reporting costs for Grenke, which will erode net margins and make scaling across multiple geographies significantly more challenging.
  
• Increased competition from digital-first and fintech leasing providers is expected to intensify, leading to ongoing pressure on pricing and profitability, as larger, tech-enabled rivals scale with lower operating costs and can more aggressively undercut Grenke's offerings, negatively impacting both revenues and earnings.
  
• Persistent macroeconomic volatility in core European markets, combined with Grenke's continued exposure to SME clients with elevated default risks, raises the likelihood of structurally higher loss rates and greater risk provisioning in future cycles, which could depress reported net earnings for an extended period.

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 decrease by 0.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 7.0% today to 20.5% in 3 years time.
• The bearish analysts expect earnings to reach €129.9 million (and earnings per share of €2.93) by about August 2028, up from €43.6 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 5.6x on those 2028 earnings, down from 18.0x today. This future PE is lower than the current PE for the GB Diversified Financial industry at 18.0x.
• Analysts expect the number of shares outstanding to decline by 4.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.81%, as per the Simply Wall St company report.

Grenke Future Earnings Per Share Growth

Risks

• The continued double-digit growth in operating income and stable new business volumes, together with improvements in cost discipline and an expanding lease portfolio, suggest that revenues and net margins may rise over the long term.
  
• Ongoing investments in digitalization, such as integrations with resellers, platform enhancements, and increased process automation, are improving efficiency and could allow Grenke to scale with less headcount growth, leading to operating leverage gains and higher future earnings.
  
• The company's diversified funding mix, including strategic partnerships with banks like Intesa Sanpaolo and successful benchmark bond placements, provides ample liquidity and reduces refinancing risk, supporting sustainable growth and stronger balance sheet resilience.
  
• Risk management actions, like higher pricing of new contracts to reflect elevated loss expectations and strengthened collections efforts, have already led to a trend reversal in group earnings and a reduction in loss rates, signalling improved future profitability.
  
• The long-term average loss rate is expected to normalize at around 1.5 percent, and management's guidance indicates confidence in maintaining a 10 percent compound annual growth rate in new business and profitability, which would support sustained improvements in net profit and shareholder value.

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 €633.1 million, earnings will come to €129.9 million, and it would be trading on a PE ratio of 5.6x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of €17.76, the bearish analyst price target of €14.5 is 22.5% 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.