Digital Financial Services Rollout Will Improve Core Banking Services

Key Takeaways

• Strategic digital transformation and leadership expansion aim to enhance operational leverage and efficiency, potentially boosting revenue, margins, and net earnings.
  
• Focus on favorable funding strategies and disciplined capital management to reduce financial costs and enhance financial resilience and earnings stability.
  
• Hyperinflation and currency fluctuations in key markets, combined with strategic and regulatory challenges, pose risks to profitability and operational efficiency.

Catalysts

Provides microfinancing services in Africa and Asia.

• The digital transformation strategy, including the rollout of a digital financial services platform and core banking system, is expected to enhance operational leverage and client offerings. This could drive increased client numbers and broader banking products, potentially boosting revenue and net margins.
  
• The company's focus on expanding its leadership and management layers to improve operational excellence is intended to boost productivity and efficiency. This should enable the loan portfolio (OLP) to grow, thereby increasing profitability and net earnings.
  
• ASA International’s plans to obtain additional deposit-taking licenses are aimed at reducing the cost of funding and improving the risk profile, which could positively impact net margins and earnings stability.
  
• The favorable funding strategy, including increasing local deposits and a stable funding cost profile, supports the growth of the business and may contribute to lower financial costs and improved net margins.
  
• The strategic focus on equity preservation, reducing the effective tax rate, mitigating FX impact, and implementing disciplined capital allocation are intended to enhance financial resilience and earnings stability.

ASA International Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ASA International Group's revenue will grow by 18.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.8% today to 20.3% in 3 years time.
• Analysts expect earnings to reach $60.4 million (and earnings per share of $0.68) by about May 2028, up from $28.5 million 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 5.2x on those 2028 earnings, up from 4.9x today. This future PE is lower than the current PE for the GB Consumer Finance industry at 8.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.6%, as per the Simply Wall St company report.

ASA International Group Future Earnings Per Share Growth

Risks

• Hyperinflation in markets like Ghana and Sierra Leone, and potential hyperinflation in Nigeria, may negatively affect profitability, as evidenced by IAS 29 adjustments leading to a $3.9 million negative impact on 2024 earnings.
  
• The company's cost-to-income ratio might increase into the mid-60s due to investments in digital transformation, potentially straining operational expenses in the short to medium term.
  
• Exposure to currency fluctuations and the impact of FX translation reserve pose risks to net income, demonstrated by the previous year's currency-related comprehensive income adjustments.
  
• Challenges in executing the retreat from the Indian market and deconsolidation efforts could affect revenue streams and complicate market strategy.
  
• Pending regulatory actions, such as implementation of transfer pricing in certain countries, may continue to contribute to high effective tax rates, impacting net profitability.

Valuation

• The analysts have a consensus price target of £1.907 for ASA International 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 £2.3, and the most bearish reporting a price target of just £1.35.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $297.5 million, earnings will come to $60.4 million, and it would be trading on a PE ratio of 5.2x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of £1.06, the analyst price target of £1.91 is 44.7% 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.