Deleveraging And NPL Improvements Will Strengthen Financial Flexibility

Key Takeaways

• Axactor's deleveraging strategy and strong liquidity position enhance debt management and strategic investment potential, impacting cash flow stability and earnings.
  
• Growth in 3PC revenue and cost improvements in NPL operations may bolster net margins and future earnings.
  
• Axactor's financial health faces challenges from macroeconomic impacts, unsustainable revenue sources, high debt levels, and collection issues, threatening future returns and financial flexibility.

Catalysts

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

• Axactor's deleveraging strategy, demonstrated through important portfolio sales, is improving financial flexibility, which could better position the company for debt management and investment opportunities, potentially impacting cash flow stability and future earnings.
  
• The company is focused on maintaining a strong balance sheet with high liquidity, using €100 million available for either bond buybacks or portfolio investments. This liquidity can reduce financial risk and support strategic growth, affecting net margins and earnings stability.
  
• The expected improvement in 3PC (Third Party Collection) revenue, with double-digit growth in key markets like Norway, Germany, and Italy, highlights strong operational performance that could bolster future revenue streams and contribute positively to net margins.
  
• Axactor's ongoing cost improvement projects, particularly within the NPL (non-performing loans) segment, aim to reduce operating expenses and improve operational efficiency, which may enhance net margins and earnings growth over time.
  
• The company's refinancing strategy, including bond buybacks and extending the RCF with potential smaller bond maturities, may stabilize debt servicing costs and improve financing costs, positively affecting the company's net income and cash flow projections.

Axactor Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Axactor's revenue will grow by 27.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -64.1% today to 22.5% in 3 years time.
• Analysts expect earnings to reach €57.6 million (and earnings per share of €0.19) by about March 2028, up from €-79.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 3.3x on those 2028 earnings, up from -1.4x today. This future PE is lower than the current PE for the GB Consumer Finance industry at 13.1x.
• 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 11.14%, as per the Simply Wall St company report.

Axactor Future Earnings Per Share Growth

Risks

• The negative revaluation of €104 million due to challenging macroeconomic environments and collection performance issues, especially in Sweden and Germany, significantly impacted Axactor's financial metrics, causing a negative return on equity of 19% for 2024. This poses a risk to future earnings and returns to shareholders.
  
• Axactor's revenue and EBITDA figures were bolstered by a one-time portfolio sale, suggesting that underlying revenue and cash EBITDA declined when adjusted for this transaction. This indicates a risk to sustainable revenue and profit generation without such supportive sales.
  
• The NPL segment's performance was negatively impacted by collection challenges, and while future collection performance is expected to stabilize, the macro environment remains unpredictable, potentially affecting revenue from this segment.
  
• High outstanding debt levels, with €900 million in interest-bearing debt, and looming bond maturities may challenge financial flexibility if refinancing conditions are unfavorable, potentially impacting net margins and cash flow.
  
• The absence of dividend payments for 2024, coupled with a strategy to be cautious with investments in light of debt management priorities, suggests potential challenges in maximizing shareholder returns in the short term.

Valuation

• The analysts have a consensus price target of NOK5.289 for Axactor 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 NOK6.78, and the most bearish reporting a price target of just NOK3.79.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €256.2 million, earnings will come to €57.6 million, and it would be trading on a PE ratio of 3.3x, assuming you use a discount rate of 11.1%.
  
• Given the current share price of NOK4.2, the analyst price target of NOK5.29 is 20.5% 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.