COG Financial Services Ltd (COQ)
Hi James & Team, Can you explain why COG is dropping over the last 7 trading days? I note Wilson Asset Management Group has significantly increased its substantial holdings. Do you think COG has bottomed? Thanks
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Answer
Hi Sidney,
COQ is a relatively small $370mn Australian financial services group focused on asset finance, finance broking and aggregation for small-to-medium enterprises (SMEs). It operates Australia’s largest asset finance broker aggregator network, helping brokers arrange equipment and business finance, and also provides novated leasing and salary packaging services, asset management and lending products to commercial customers.
The stocks corrected ~35% from its October high although being a small cap volatile swings are not unexpected. The pullback looks more like a macro/valuation reset (rates + risk appetite) than a “business broken” event, but the market is pricing in a tougher operating backdrop for SME credit and finance volumes given the change in outlook towards local interest rates (market now pricing in a 70% probability of a hike next week vs multiple cuts priced in last year).
- The prospect of higher interest rates would be hurting sentiment: COG is leveraged to SME/business finance volumes. If rates move higher, it can mean slower credit growth, weaker demand for equipment finance/novated leasing, and more credit stress at the margin.
- As an aggregator/broker/lender mix, earnings are tied to settlements and if rate hikes soften business confidence volumes can slow and the market quickly marks down expectations.
We believe the stock offers good risk/reward around the $1.70 area with revenue forecast to grow ~20% by FY27, although from a valuation perspective its simply re-rated from being expensive back to its average multiple of recent years.
