COG Financial Services Ltd (ASX:COG)
Dear Team, Any reason why COG has been dropping over the last several months? Can you see the light at the end of the tunnel? Have you got an entry price into the stock in mind? Thanks
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Answer
Hi,
We answered a question on COG in January and not much has changed since, apart from the share price which has dropped another ~20%.
COG is a relatively small $270mn Australian financial services group focused on asset finance, finance broking and aggregation for small-to-medium enterprises (SMEs). The stocks now halved from its October high although being a small cap volatile swings are not unexpected.
The pullback continues to look more like a macro/valuation reset (rates + risk appetite) than a “business broken” event. The market is pricing in a tougher operating backdrop for SME credit and finance volumes given the change in outlook towards the Australian economy and local interest rates – credit markets are now pricing in a 75% probability of another rate hike by the RBA in May.
- The prospect of higher interest rates would be hurting sentiment: COG is leveraged to SME/business finance volumes. If rates continue to 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 $1.25 area with revenue forecast to grow ~20% by FY27, although further weakness is likely if the economic picture deteriorates further as the oil price continues to rise.
