Tightened European Regulations And Shrinking NPL Markets Will Weaken Prospects

Key Takeaways

• Digitization and evolving regulations are shrinking Axactor's core non-performing loan market and increasing compliance costs, with negative implications for growth and profit margins.
  
• Heavy dependence on a few geographies and high leverage exposes Axactor to market, regulatory, and refinancing risks that could significantly disrupt revenue and earnings stability.
  
• Strong market positioning, operational efficiency, and disciplined financial management underpin Axactor's ability to drive recurring revenue and profit growth in a consolidating sector.

Catalysts

Through its subsidiaries, operates as a debt management and collection company in Sweden, Finland, Germany, Italy, Norway, and Spain.

• Ongoing digitization of payment systems and widespread fintech adoption across Europe are reducing default rates, which are set to shrink Axactor's addressable non-performing loan (NPL) market and curb future revenue growth as consumer credit quality improves.
  
• Regulatory scrutiny and tightening consumer protection laws are expected to sharply reduce the supply of NPL portfolios available for acquisition and further constrain Axactor's ability to grow its collections platform, likely impacting both revenues and net margins through higher compliance costs and restricted operating models.
  
• The company's overreliance on key geographies such as Spain and Norway exposes it to region-specific regulatory or macroeconomic risks; any downturn, legislative change, or unfavorable policy could introduce sudden volatility and uncertainty in both revenue streams and earnings.
  
• Persistently high leverage and the capital-intensive nature of Axactor's NPL purchases make it vulnerable to rising interest rates or a tougher refinancing environment, increasing interest expenses and reducing net margins if future bond issues demand substantially higher spreads or market access tightens.
  
• Structural changes in the European financial sector, including continued consolidation among major banks and advances in real-time credit monitoring, could materially decrease the long-term supply of NPLs, intensifying competition for assets and eroding Axactor's profitability and return on equity.

Axactor Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Axactor compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Axactor's revenue will grow by 25.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -53.5% today to 10.8% in 3 years time.
• The bearish analysts expect earnings to reach €27.7 million (and earnings per share of €0.09) by about July 2028, up from €-70.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.5x on those 2028 earnings, up from -3.2x today. This future PE is lower than the current PE for the GB Consumer Finance industry at 20.3x.
• 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 11.32%, as per the Simply Wall St company report.

Axactor Future Earnings Per Share Growth

Risks

• Sustained double-digit growth and margin expansion in the capital-light 3PC segment, combined with clear evidence of winning market share in core geographies such as Norway and Spain, positions Axactor for recurring fee income growth and operating leverage, supporting both future revenue and net margins.
  
• Consistent delivery on cost reduction initiatives, including a projected 700,000 dollar reduction in quarterly operating expenses from IT infrastructure migration, is expected to improve profitability and EBITDA margins as the benefits are fully realized from the third quarter onward.
  
• The extension of the revolving credit facility to June 2028 on attractive terms, combined with ongoing bond buybacks at a discount, is reducing interest expenses and strengthening the balance sheet, thereby freeing cash flow and enhancing earnings and net margin potential over the long term.
  
• A strong collection performance near 100 percent on NPLs, supported by robust recovery on secured portfolios in Spain and stable housing markets, together with opportunities to deploy over 100 million euros in attractive-yielding investments, provides a solid foundation for predictable revenue growth and sustained high return on equity.
  
• Industry-wide trends, including a reduction in the number of competitors in key markets and an active pipeline of NPL investments at improving internal rates of return, suggest Axactor is well-positioned to capture higher returns, protect market share, and potentially grow revenue and profit even in a consolidating or more rationalized European debt recovery sector.

Valuation

• The assumed bearish price target for Axactor is NOK5.87, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Axactor's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK10.09, and the most bearish reporting a price target of just NOK5.87.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €256.4 million, earnings will come to €27.7 million, and it would be trading on a PE ratio of 7.5x, assuming you use a discount rate of 11.3%.
• Given the current share price of NOK8.78, the bearish analyst price target of NOK5.87 is 49.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.