Small Caps | Sep 23 2021
This story features PLENTI GROUP LIMITED. For more info SHARE ANALYSIS: PLT
Non-bank lender Plenti Group is making a mark, leading the way for the fintech sector as it nears a $1bn loan book
-Credit quality improved by the shift to secured automotive loans and household renewables
-Warehouse facilities significantly reduce funding costs
-Increased consumer interest has enabled improvements in credit score and risk rating
By Eva Brocklehurst
Lending money is what Plenti Group ((PLT)) is all about, having achieved substantial growth in originating loans in the automotive sector, renewables and personal finance. Guidance has been keenly welcomed and will be closely monitored by brokers as it includes achieving net profit by June 2022 and a $1bn loan book by March 2022.
If these ambitions are achieved, Plenti Group will be the first financial technology lender to do so, Bell Potter asserts, while Moelis notes a $1bn loan book would represent around 1% of the consumer loan market. The company has also set a target for a reduction in its cost-to-income ratio to 35%, from 55% in FY21.
Plenti Group has improved its credit quality by shifting to secured automotive loans and household renewables and away from unsecured personal loans. Increased use of warehouse funding has also reduced costs on new loan origination.
The main growth opportunities envisaged are the new commercial automotive book, expansion of renewables lending and cross-selling of products and services to existing customers, and the business appears well able to service the demand for automotive finance that is expected to occur once lockdowns are lifted.
Warehouse facilities have been established with domestic institutions that significantly reduce funding costs. Moelis expects margins will expand as funding costs are re-based under the new warehouse structure (upgraded to $450m from $350m) and costs are amortised over the length of the loan book.
The broker, initiating coverage with a Buy rating and $1.93 target, envisages funding costs will reduce to 3.0% from 5.7% and cash margins increase to 1.3% from 1.5%. All by FY24.
Bell Potter points out a lack of bank wholesale senior debt issuance has resulted in increased demand for securitisation issuance in both RMBS (residential mortgage-backed securities) and ABS (asset-backed securities). The broker assesses the acceleration in the loan book will, in turn, ramp up profitability and retains a Buy rating with a $1.85 target.
Wilsons agrees that the $1bn loan book will be a catalyst, as will the first month of profitability and a second securitisation deal. Plenti Group's recent ABS transaction has set the standard for further deals, requiring just 0.5% of equity funding which will improve cash flow returns.
Moreover, the pricing of the deal appears superior, given preliminary ratings from Moody's suggests pricing could be up to 100 basis points better than previously expected.
The broker, maintaining an Overweight rating and $1.75 target, notes Plenti Group has been able to attract significant consumer interest in recent years and subsequently improve its average borrower credit score and risk rating.
The company's first quarter (year ending March) was a record in terms of originations and gross loans and Shaw and Partners believes the market is underestimating the current run-rate. The broker envisages multiples to the current share price in the medium term if the business can execute on its growth ambitions, and maintains a Buy rating and $1.90 target.
Shaw and Partners calculates that the June run-rate, in terms of originations and the current loan book size, when coupled with estimates for yield, repayment rate and costs, suggests a loan book scale of $1.8bn (excluding any increase in originations), and more than $180m in revenue and $40m in net profit.
Moelis also expects the stock to re-rate as key milestones are reached, even despite the potential for disruption from the pandemic during the second quarter, and highlights the main catalysts are new securitisation deals and renegotiation of warehouse terms. The main risks revolve around competitive pricing pressure and macro economic factors such as funding costs or a rise in unemployment.
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