Growth Italy Initiative Will Significantly Reduce Operational Expenses By 2025

Key Takeaways

• Strategic investments and initiatives aim to enhance future revenue and net margins through improved IRRs and reduced operational expenses.
  
• Focus on Banking and Finance, cost control, and interest rate strategies may boost cash flow, earnings, and return on equity.
  
• Axactor's profitability is pressured by a harsh macroeconomic environment, high interest rates, and underperforming portfolios, alongside rising costs and competitive asset pricing challenges.

Catalysts

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

• The company plans to gradually ramp up investments to €150 million by the end of the year, which could improve future revenue and net margins by ensuring investments are limited to attractive IRRs.
  
• Initiatives such as Growth Italy and changing the IT infrastructure provider are expected to reduce operational expenses significantly by 2025, thus positively impacting net margins and EBITDA.
  
• With a strategic focus on the Banking and Finance segment in Norway, the 3PC segment is experiencing growth and improved contribution margins, driving potential future revenue and net margin improvements.
  
• A potential decline in interest rates coupled with further hedging could substantially improve cash flow and net financial results, positively affecting earnings and return on equity.
  
• The company’s strict cost control measures are critical in maintaining a healthy EBITDA margin despite a challenging collection environment, which could result in improved earnings if collections stabilize or improve.

Axactor Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Axactor's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.0% today to 20.8% in 3 years time.
• Analysts expect earnings to reach €55.3 million (and earnings per share of €0.18) by about February 2028, up from €13.8 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €16.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 2.9x on those 2028 earnings, down from 6.9x today. This future PE is lower than the current PE for the GB Consumer Finance industry at 9.5x.
• 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 10.61%, as per the Simply Wall St company report.

Axactor Future Earnings Per Share Growth

Risks

• Axactor faces a challenging macroeconomic environment and government-imposed debt relief initiatives, which are negatively impacting collection performance and limiting revenue growth rates.
  
• Interest rates remain high, with higher borrowing costs putting pressure on Axactor's margins and profitability; only 8% of net interest-bearing debt is hedged, affecting earnings significantly.
  
• Collection performance is below expectations due to underperforming vintage portfolios from 2016 to 2019, which might require impairments if collection does not improve, impacting net margins and earnings.
  
• Increasing cost pressures from factors like salaries, IT licenses, and office rents challenge Axactor's ability to maintain operating expenses, potentially affecting net margins if cost reductions are insufficient.
  
• NPL asset prices are moving in an unfavorable direction due to emerging market competition, affecting the potential IRR from future investments, and bringing uncertainty to future revenue generation.

Valuation

• The analysts have a consensus price target of NOK4.567 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 NOK5.45, and the most bearish reporting a price target of just NOK3.77.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €265.2 million, earnings will come to €55.3 million, and it would be trading on a PE ratio of 2.9x, assuming you use a discount rate of 10.6%.
  
• Given the current share price of NOK3.65, the analyst price target of NOK4.57 is 20.1% 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.