Strong Solvency Ratio Will Support Acquisitions And Organic Expansion

Key Takeaways

• Acquisitions and tech investments may enhance efficiencies and profitability, boosting revenue streams and long-term growth potential.
  
• Strong client retention and financial solvency support consistent revenue and expansion opportunities through acquisitions and organic growth.
  
• Economic volatility, rising insolvencies, and competitive pressures in insurance pose risks to profitability and consistent revenue growth for COFACE.

Catalysts

Through its subsidiaries, provides credit insurance products and related services for microenterprises, small and medium enterprises, mid-market companies, international corporations, financial institutions, and clients of distribution partners.

• The acquisition of Cedar Rose, a key information provider in the Middle East, is expected to enhance COFACE's information services capabilities, potentially boosting future revenue streams.
  
• The continued investment in COFACE's business information (BI) venture and growth in the debt collection segment, both growing at double digits, indicate potential future earnings growth as these ventures scale.
  
• The company's high client retention rate of 92.3% and selective growth strategy are likely to stabilize and potentially increase revenue, contributing to consistent revenue streams.
  
• The deliberate investment in technology and data is expected to drive efficiencies and improve net margins over time, enhancing the overall profitability of the company.
  
• COFACE's strong solvency ratio (196%), above the target range, provides a solid foundation for future growth activities, such as acquisitions and organic expansion, which can lead to increased earnings.

COFACE Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming COFACE's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.8% today to 12.0% in 3 years time.
• Analysts expect earnings to reach €255.5 million (and earnings per share of €1.75) by about August 2028, up from €243.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €283 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.4x on those 2028 earnings, up from 10.0x today. This future PE is greater than the current PE for the GB Insurance industry at 11.4x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.92%, as per the Simply Wall St company report.

COFACE Future Earnings Per Share Growth

Risks

• The company's total revenues are slightly down from 2023 at -0.6%, with insurance revenue specifically down 2.2%, potentially impacting the overall revenue and net margins.
  
• The combined ratio has increased by 1.2 points, driven by a 3.6% increase in the cost ratio, which suggests ongoing cost pressures and investments that could impact net earnings.
  
• The high rate of insolvencies, with numbers 20-30% higher than 2019, presents a risk to maintain profitability and manage claims, potentially affecting net margins.
  
• Market volatility and slowing economies, particularly in Europe, add uncertainty that may prevent consistent revenue growth and affect net income.
  
• Factoring and trade credit insurance businesses are facing competitive pressures and pricing declines, with a price effect at -1.4%, which could challenge future revenue generation and profit margins.

Valuation

• The analysts have a consensus price target of €18.275 for COFACE 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 €21.8, and the most bearish reporting a price target of just €16.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €2.1 billion, earnings will come to €255.5 million, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 7.9%.
• Given the current share price of €16.33, the analyst price target of €18.27 is 10.6% 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.