Ameriabank Acquisition Will Expand Digital Banking In Georgia And Armenia, Reducing Costs And Improving Customer Engagement

Key Takeaways

• Expansion into Armenia and digital banking solutions are expected to drive growth, increase revenue, and improve margins.
  
• Favorable economic conditions, digitalization of products, and disciplined capital return policy are set to enhance profits and shareholder value.
  
• Reliance on geopolitical stability and high growth expectations in Armenia poses risks to sustainable revenue and net earnings amidst rising costs and competitive pressures.

Catalysts

Through its subsidiaries, provides banking and financial services with focus on the Georgian and Armenian markets.

• The expansion into Armenia through the acquisition of Ameriabank is expected to drive significant growth, contributing 26% of the group's total assets and positioning the company in two key geographies, thus increasing revenue and earnings potential.
  
• The deployment of innovative digital banking solutions, recognized as the world's Best Digital Bank by Global Finance, is expected to enhance customer engagement and reduce operating costs, potentially improving net margins.
  
• The economic conditions in Georgia and Armenia are conducive to growth, with stabilized inflation, strong external sector inflows, and rising incomes, which should support loan demand and revenue growth.
  
• The focus on increasing digitalization of products, with 62% of products now sold digitally and loan issuance at 84% digitally, is expected to lower operational costs and enhance profit margins.
  
• The commitment to a disciplined capital return policy, including a proposed dividend increase and additional share buybacks, is anticipated to enhance earnings per share and provide shareholder value.

Lion Finance Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lion Finance Group's revenue will grow by 18.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 72.9% today to 47.8% in 3 years time.
• Analysts expect earnings to reach GEL 2.7 billion (and earnings per share of GEL 69.19) by about March 2028, up from GEL 2.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 4.1x on those 2028 earnings, up from 3.6x today. This future PE is lower than the current PE for the GB Banks industry at 8.2x.
• Analysts expect the number of shares outstanding to decline by 2.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.88%, as per the Simply Wall St company report.

Lion Finance Group Future Earnings Per Share Growth

Risks

• Geopolitical tensions and domestic political instability in Georgia and Armenia, though subsiding, could impact economic activity and consumer confidence, potentially affecting revenue growth.
  
• High growth expectations in Armenia (25%-30%), while ambitious, may not be sustainable in the long term; any slowdown could impact net earnings.
  
• The reliance on external sector inflows and geopolitical stability in small, open economies like Georgia and Armenia could impact local currency stability and, subsequently, financial performance.
  
• Inflation is expected to rise slightly, which, along with differences in monetary policy responses, could increase costs and squeeze net margins.
  
• The competitive landscape in Armenia and potential regulatory resistance to excessive concentration could limit Lion Finance Group's growth potential and profitability in this market.

Valuation

• The analysts have a consensus price target of GEL63.652 for Lion Finance Group 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 GEL72.5, and the most bearish reporting a price target of just GEL52.26.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be GEL5.7 billion, earnings will come to GEL2.7 billion, and it would be trading on a PE ratio of 4.1x, assuming you use a discount rate of 7.9%.
• Given the current share price of GEL57.3, the analyst price target of GEL63.65 is 10.0% 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.