Technology Investments And Positive Housing Outlook Will Support Future Profitability

Key Takeaways

• Investment in technology and operational efficiencies could enhance growth through improved cost management and operational leverage, boosting future earnings.
  
• Focused lending strategies and capital management may lead to improved margins and shareholder returns, aided by positive macroeconomic conditions.
  
• OSB Group faces challenges in maintaining profitability amid tight margins, increased operational costs, liquidity pressures, and uncertain geopolitical and economic conditions.

Catalysts

Through its subsidiaries, operates as a specialist mortgage lending and retail savings company in the United Kingdom and the Channel Islands.

• OSB Group's transformation program, including investment in technology and operational efficiencies, may enhance future growth by improving cost management and operational leverage, potentially boosting earnings growth.
  
• The group's disciplined approach to new lending and focus on high-yielding segments may lead to improved net interest margins (NIM) and stabilized NIM dynamics in 2025 and beyond, supporting future revenue growth.
  
• The launch of new digital platforms and products, such as the new sales platform for Kent Reliance and the popular intermediary mobile app, could bolster revenue by attracting more customers and enhancing service capabilities.
  
• OSB Group's ongoing capital management strategy, including significant share buybacks and a progressive dividend policy, may increase earnings per share (EPS), translating into greater shareholder returns.
  
• As macroeconomic conditions improve, including a positive outlook on house prices, OSB Group's loan loss provisions are expected to decrease, potentially leading to better net margins and higher profitability.

OSB Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming OSB Group's revenue will grow by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 44.0% today to 41.0% in 3 years time.
• Analysts expect earnings to reach £301.7 million (and earnings per share of £0.96) by about March 2028, up from £299.1 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 8.4x on those 2028 earnings, up from 5.8x today. This future PE is lower than the current PE for the GB Diversified Financial industry at 13.5x.
• Analysts expect the number of shares outstanding to decline by 4.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.56%, as per the Simply Wall St company report.

OSB Group Future Earnings Per Share Growth

Risks

• OSB Group's net interest margin (NIM) guidance for upcoming years reflects pressure due to continued headwinds from lower mortgage spreads and higher funding costs, potentially impacting net margins and profitability.
  
• Increased administrative expenses, particularly from investment in transformation and compliance with new regulations, elevate operational costs, possibly affecting net margins if not offset by corresponding revenue growth.
  
• The need to repay Bank of England's TFSME scheme by 2025 creates pressure on liquidity management, which could impact earnings and restrict opportunities for leveraging low-cost funding sources.
  
• Projected growth in retail deposits may not sufficiently counteract the reduction in net loan book due to strategic derecognition transactions, potentially affecting revenue levels.
  
• Despite strong capital generation, geopolitical uncertainties and economic volatility could influence capital return strategies, potentially affecting shareholder returns and overall financial stability.

Valuation

• The analysts have a consensus price target of £5.538 for OSB 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 £6.65, and the most bearish reporting a price target of just £4.14.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £735.2 million, earnings will come to £301.7 million, and it would be trading on a PE ratio of 8.4x, assuming you use a discount rate of 12.6%.
• Given the current share price of £4.65, the analyst price target of £5.54 is 16.0% 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.