Technology Investments And Geographic Diversification Will Unlock Value

Key Takeaways

• Investment in AI and tech, new service lines, and a Lloyd's syndicate strengthen profitability, efficiency, and resilience within financial services and risk solutions.
  
• Geographic expansion and ESG progress drive diversified, sustainable growth while reducing reliance on mature markets and enhancing regulatory alignment.
  
• Challenging market conditions, margin compression from competition, rising costs from strategic investments, currency volatility, and inflation all threaten profitability and earnings growth.

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.

• Continued investments in data, technology, and AI-such as the creation of a dedicated tech hub and deployment of AI-generated credit scoring-are expected to enhance risk assessment and operational efficiency, positioning COFACE for improved net margins and profitability as digitalization accelerates within financial services.
  
• Strategic expansion in Business Information and third-party Debt Collection has yielded double-digit revenue growth, with these service lines benefitting from increased demand amid economic volatility and offering COFACE diversified, capital-light revenue streams with the potential to lift overall earnings.
  
• The establishment of a Lloyd's syndicate provides access to AA-rated solutions, enabling COFACE to capture a larger share of the financial institutions segment (where rating quality is critical), supporting new premium growth and adding resilience to revenues.
  
• Ongoing geographic diversification, especially in high-growth emerging markets such as Asia-Pacific and Latin America, enables COFACE to capitalize on rising SME participation in global trade and reduce overexposure to sluggish European markets, supporting long-term revenue expansion and portfolio risk reduction.
  
• Progress on ESG targets-including significant reductions in portfolio carbon intensity and continued development of sustainable insurance offerings-positions COFACE to meet growing client and regulatory demand for ESG-aligned products, potentially unlocking new revenue streams and preventing future cost escalation related to compliance.

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 9.8x today. This future PE is greater than the current PE for the GB Insurance industry at 11.1x.
• 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 7.99%, as per the Simply Wall St company report.

COFACE Future Earnings Per Share Growth

Risks

• Persistently high global insolvencies and sluggish GDP growth, especially in core regions like industrial Europe, may further increase COFACE's loss ratios and depress revenue growth as economic headwinds limit client activity and new business opportunities.
  
• Fierce competition in the credit insurance market, with some players willing to accept lower returns and take on higher risks, continues to exert downward pressure on pricing, which is reflected in COFACE's negative pricing trend (-1.4%), ultimately compressing underwriting margins and reducing earnings potential.
  
• Deliberate heavy investments in Business Information, debt collection, and technology are currently a drag on the cost ratio (costs up 8.2% year-on-year, expense ratio up 2.8pts), and there is execution risk around whether these investments will deliver expected returns, potentially impacting net margins and delaying improvement in bottom-line profitability.
  
• Exposure to FX volatility, particularly adverse movements between the USD and EUR, has had a measurable negative impact on net loss ratios and investment income, posing ongoing risks to net profit if dollar weakness or similar currency swings persist.
  
• Ongoing inflation and sustained wage and operating cost increases, during a period when premium turnover growth is flattening due to slower client activity, may further erode cost efficiency, placing downward pressure on net margins and limiting earnings growth.

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 8.0%.
  
• Given the current share price of €15.99, the analyst price target of €18.27 is 12.5% 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.