Expansion Into African Markets And Digital Initiatives Will Boost Future Performance

Key Takeaways

• Expansion into African markets and digital channels is set to drive capital-light revenue growth, enhancing profitability and shareholder value.
  
• Strategic investments in digital capabilities and client acquisition, along with operational efficiencies, aim to boost revenue and net margins.
  
• Geopolitical tensions, fiscal constraints, and rising NPLs threaten revenue growth and profit margins amid economic uncertainty and financial strain in African markets.

Catalysts

Provides retail, business, corporate, investment banking, insurance, financial, and wealth management products and services in South Africa and internationally.

• The expectation of GDP growth in sub-Saharan Africa, especially in East Africa, could bolster revenue through increased lending and financial services across the region.
  
• The predicted decline in inflation and potential interest rate cuts in South Africa, along with policy easing in other African markets, could enhance net margins and improve consumer spending, benefiting overall earnings.
  
• Strategic investments in digital capabilities, client acquisition, and enhanced product offerings, particularly in retail and SME banking, aim to drive revenue growth and improve operational efficiency.
  
• The focus on diversifying income streams, such as the expansion into African markets with new offices and enhanced digital channels, is expected to contribute to capital-light revenue growth, positively impacting profitability and shareholder value.
  
• The ongoing optimization and reduction of the physical branch network, along with the strategic focus on productivity and cost management initiatives, are poised to improve net margins and cost-to-income ratios over the medium term.

Absa Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Absa Group's revenue will grow by 14.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.8% today to 22.3% in 3 years time.
• Analysts expect earnings to reach ZAR 30.1 billion (and earnings per share of ZAR 33.12) by about February 2028, up from ZAR 18.9 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.1x on those 2028 earnings, up from 8.3x today. This future PE is greater than the current PE for the ZA Banks industry at 8.3x.
• 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 18.32%, as per the Simply Wall St company report.

Absa Group Future Earnings Per Share Growth

Risks

• Heightened geopolitical tensions and national elections introduce economic uncertainty, potentially impacting revenue and profits due to adverse market conditions.
  
• Elevated fiscal constraints and cost-of-living pressures in African markets could suppress economic activity, affecting revenue growth and profit margins negatively.
  
• A 5% decrease in diluted headline earnings per share (HEPS), attributed to lower noninterest income and significant financial drags, could signal challenges in maintaining earnings momentum.
  
• NPLs (non-performing loans) have risen, and credit loss ratios remain above target, which may pressure net margins due to increased provisions for bad debts.
  
• Lower consumer confidence and financial strain, combined with high interest rates, could dampen loan demand and deposit growth, impacting revenue streams and profitability.

Valuation

• The analysts have a consensus price target of ZAR221.054 for Absa 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 ZAR242.35, and the most bearish reporting a price target of just ZAR180.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ZAR134.9 billion, earnings will come to ZAR30.1 billion, and it would be trading on a PE ratio of 10.1x, assuming you use a discount rate of 18.3%.
  
• Given the current share price of ZAR188.76, the analyst price target of ZAR221.05 is 14.6% 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.