Partnership With APAX Partners And Technology Initiatives Will Strengthen Future Profitability

Key Takeaways

• The strategic shift towards SME lending and cost reductions is expected to drive long-term profitability and revenue growth.
  
• Partnerships and technology initiatives are projected to enhance profitability and bolster earnings through cost savings and additional revenues.
  
• Transitioning from direct NPE investments and high funding costs challenge profitability, while IT outsourcing introduces operational risks; SME lending growth is crucial amid macroeconomic uncertainties.

Catalysts

Provides private banking, and investment and trading services in Italy.

• The strategic shift towards SME lending growth and cost reductions is expected to drive long-term profitability and revenue growth, despite short-term challenges.
  
• The partnership with APAX Partners is projected to generate significant financial gains, including cost savings and additional revenue through technologies and outsourcing, positively impacting earnings.
  
• Specialized credit and new business origination, which are growing significantly, are anticipated to increase core revenues over time, supporting revenue growth.
  
• Technology initiatives and ventures, such as Hype and b-ilty, show positive trends that are expected to enhance future profitability and boost earnings.
  
• Future cost reductions from eliminated NPE portfolio costs and the new tech partnerships are expected to improve net margins over time.

illimity Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming illimity Bank's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.2% today to 21.0% in 3 years time.
• Analysts expect earnings to reach €72.6 million (and earnings per share of €0.85) by about January 2028, up from €60.4 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 7.0x on those 2028 earnings, up from 5.1x today. This future PE is lower than the current PE for the IT Diversified Financial industry at 7.2x.
• Analysts expect the number of shares outstanding to grow by 1.03% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.9%, as per the Simply Wall St company report.

illimity Bank Future Earnings Per Share Growth

Risks

• The exit from direct NPE (Non-Performing Exposure) investments may temporarily impact short-term profitability, leading to potential challenges in maintaining revenue and net margin levels.
  
• Reliance on outsourcing IT systems to a new company introduces dependency risks. If the outsourced IT services face issues, it could adversely affect operational efficiency and service delivery, impacting earnings.
  
• High cost of funding, particularly from recent bond issuances, affects net interest income, which was reported down by 3% quarter-on-quarter, indicating potential pressure on future revenues and profits.
  
• Cost reductions are expected through IT outsourcing and other measures, but execution risks exist, particularly if promised savings do not materialize or are delayed, affecting net margins.
  
• The asset quality and future profitability are tied to SME lending growth and cost efficiency; however, any macroeconomic downturn affecting SMEs could increase the NPE ratio, thereby increasing the cost of risk and potentially reducing earnings.

Valuation

• The analysts have a consensus price target of €4.52 for illimity Bank 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 €5.25, and the most bearish reporting a price target of just €3.9.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €345.2 million, earnings will come to €72.6 million, and it would be trading on a PE ratio of 7.0x, assuming you use a discount rate of 9.9%.
  
• Given the current share price of €3.71, the analyst's price target of €4.52 is 17.8% 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.