Investments In Digitalization And India Expansion Will Strengthen Future Performance

Key Takeaways

• Significant digital investment and a new Impact Strategy target efficiency and growth, enhancing margins, return on equity, and service delivery.
  
• Strategic international expansion and targeted financial policies promote revenue diversification, EPS growth, and share price appreciation.
  
• Execution risks and macroeconomic pressures threaten profitability and strategic ventures amidst competitive dynamics and regulatory challenges, impacting future earnings and net margins.

Catalysts

Provides insurance and financial services in South Africa and internationally.

• The introduction of a new 3-year Impact Strategy aims to build on the successful completion of the previous Reinvent and Grow strategy, setting the stage for future growth with targets of 20% return on equity, 2% new business margin, and ZAR 7 billion in earnings by 2027. This is likely to positively impact earnings and ROE.
  
• Momentum Group's significant investment in digitalization, including projects in the health and insurance sectors, is expected to enhance operational efficiency and service delivery, which may improve net margins and reduce expenses over time.
  
• The group's international expansion, particularly in India with a fast-growing health insurance business that holds a 12.5% market share, presents significant growth opportunities. This could substantially contribute to revenue growth and diversification of earnings.
  
• Momentum's dividend policy, which targets a payout ratio of 33% to 50%, coupled with ongoing share buybacks, could enhance earnings per share (EPS) growth. They have announced a ZAR 1 billion share buyback, reflecting confidence in the undervaluation and future growth prospects, potentially driving share price appreciation.
  
• Improvements in value of new business (VNB), especially through increased sales volumes, better business mix, and refined pricing strategies, are expected to support higher future revenues and profitability, particularly as they address the issue of onerous contracts impacting specific segments.

Momentum Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Momentum Group's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.9% today to 8.9% in 3 years time.
• Analysts expect earnings to reach ZAR 6.0 billion (and earnings per share of ZAR 4.21) by about February 2028, up from ZAR 3.8 billion 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 11.3x on those 2028 earnings, up from 9.9x today. This future PE is lower than the current PE for the ZA Insurance industry at 12.5x.
• 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 16.72%, as per the Simply Wall St company report.

Momentum Group Future Earnings Per Share Growth

Risks

• The group's Value of New Business (VNB) margin has shown a decline, with certain business units grappling with lower-than-expected new business margins. This persistent issue in VNB margins indicates pressure on profitability and could affect future earnings if not rectified.
  
• The Implementation of IFRS 17 has led to increased expenses and adjustment costs, particularly impacting earnings. While efforts are being made to address these through strategic cost reductions, persistent cost overruns could impede net margins.
  
• Macroeconomic conditions, such as the stagnant growth of South Africa's economy and adverse externalities like flooding and hail claims, have placed pressure on the group's risk margins and profitability, particularly in non-life insurance portfolios.
  
• The competitive landscape and execution risks tied to ambitious new markets (e.g., India) and ventures (e.g., digital direct channels like Get-Up) create potential volatility in revenue streams and impose execution-related setbacks.
  
• Onerous contracts totaling ZAR 800 million impact the group's contractual service margins under IFRS 17, potentially leading to cross-subsidization issues and challenges in maintaining a balanced margin profile across product portfolios.

Valuation

• The analysts have a consensus price target of ZAR31.062 for Momentum Group based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ZAR67.3 billion, earnings will come to ZAR6.0 billion, and it would be trading on a PE ratio of 11.3x, assuming you use a discount rate of 16.7%.
  
• Given the current share price of ZAR27.96, the analyst price target of ZAR31.06 is 10.0% 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.