Expanding Digital Services In East Africa Will Drive Future Success

Key Takeaways

• Expansion into East Africa with digital services aims to grow client base and revenue while enhancing operational efficiency.
  
• Tripled net profit highlights strong growth potential and investor confidence, with expectations to surpass market profitability forecasts.
  
• Exposure to hyperinflation and currency devaluation in key markets threatens net margins, while regulatory and loan challenges could hinder revenue and portfolio quality.

Catalysts

Provides microfinancing services in Africa and Asia.

• The company is focusing on growth through expanding its client base across various regions, notably in East Africa. This includes plans to implement core banking systems and offer more digital financial services, which can drive revenue growth by increasing the number of clients and enhancing service offerings.
  
• Operational improvements, such as digital transformation and advancements in efficiency, particularly through transitioning to digital financial services, are expected to reduce costs and improve net margins by increasing operational efficiency and enhancing the client experience.
  
• The significant improvement in financial performance, with net profit more than tripling year-over-year, indicates a strong potential to further increase earnings, especially if the positive trend continues as expected, which could enhance investor confidence and valuations.
  
• The anticipated growth in operational performance driven by demand for loans, especially in high-growth markets like East Africa, is likely to boost revenue significantly, as the company meets increased client demand and scales its services.
  
• ASA International is poised to surpass market expectations for net profit, as it predicts exceeding the market consensus for profitability in 2024. This anticipation of outperformance could signal increased earnings and improved valuation if realized.

ASA International Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ASA International Group's revenue will grow by 12.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.9% today to 19.0% in 3 years time.
• Analysts expect earnings to reach $43.9 million (and earnings per share of $0.42) by about February 2028, up from $19.2 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $35.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 5.6x on those 2028 earnings, down from 5.7x today. This future PE is lower than the current PE for the GB Consumer Finance industry at 7.0x.
• 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 7.75%, as per the Simply Wall St company report.

ASA International Group Future Earnings Per Share Growth

Risks

• Exposure to hyperinflationary economies, notably Ghana and Sierra Leone, with Nigeria and Pakistan on a watchlist, could negatively impact net margins and potentially lead to further financial write-downs.
  
• Significant devaluation in local currencies, such as in Ghana and Nigeria, poses a risk to revenue as loans are denominated in dollars while income is in local currency.
  
• Increased costs due to hyperinflation have already led to a $3.5 million hit, which could continue to affect earnings if the situation persists or worsens.
  
• Challenges in securing necessary regulatory approvals and licenses in key markets, and delays in implementing digital financial services, could curb potential revenue growth.
  
• Rising past due loans in markets like India highlight potential risks in portfolio quality that could adversely affect net margins and earnings.

Valuation

• The analysts have a consensus price target of £1.583 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 £1.87, and the most bearish reporting a price target of just £1.18.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $230.8 million, earnings will come to $43.9 million, and it would be trading on a PE ratio of 5.6x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of £0.87, the analyst price target of £1.58 is 44.9% 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.