Urban Growth Will Pressure Mortgage Valuations Yet Boost Efficiency

Key Takeaways

• Sustained demand for mortgages and strong broker market share are expected to support recurring revenues and protect margins despite potential industry changes.
  
• Ongoing technology investments and diversified product expansion are anticipated to drive operational efficiencies and earnings growth, even amid rising costs and competition.
  
• AFG's market leadership, successful diversification, technology investment, and strategic acquisitions position it for stable, scalable growth amid strong long-term demand for property finance.

Catalysts

Engages in the mortgage broking business in Australia.

• The current high valuation appears to anticipate that Australia's robust population growth and ongoing urbanisation will drive continuously high demand for residential property and hence mortgage volumes, leading to sustained growth in AFG's revenue base and annuity-style income over the coming years.
  
• Investors seem to expect that regulatory support for consumer choice and broker competition, reinforced by best interest duties, will ensure mortgage brokers maintain a dominant market share (possibly exceeding 80%), protecting AFG's fee-based revenues and insulating net margins from potential margin compression or industry disruption.
  
• The share price may reflect market confidence that AFG's technology investments (e.g., BrokerEngine Plus, scalable lending infrastructure) will translate into lasting operational efficiency gains and a structurally lower cost-to-income ratio, supporting stable or expanding net earnings despite rising people costs and competitive pressures.
  
• Valuation likely assumes that industry consolidation will accelerate, allowing AFG to leverage its already significant scale and capital base to acquire additional broker groups, expand its distribution footprint, and capture increased margin and commission revenue, thereby driving long-term growth in earnings per share.
  
• There appears to be an implicit belief that rising contribution from proprietary lending and diversified products (e.g., securitisation, commercial lending, asset finance, subscription services) will persist at a high growth rate, lifting recurring revenue and improving group net margins, counterbalancing any cyclical slowdowns in the core mortgage origination market.

Australian Finance Group Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Australian Finance Group's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.2% today to 4.4% in 3 years time.
• Analysts expect earnings to reach A$66.0 million (and earnings per share of A$0.25) by about June 2029, up from A$42.1 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as A$72.7 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 14.9x on those 2029 earnings, up from 10.9x today. This future PE is greater than the current PE for the AU Diversified Financial industry at 14.6x.
• Analysts expect the number of shares outstanding to grow by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.08%, as per the Simply Wall St company report.

Risks

• The Australian mortgage broker channel continues to increase its share of home loan originations (currently 77% and moving towards 80%), making brokers an increasingly dominant and trusted distribution channel; as one of the largest players with a growing broker network and deep market penetration, AFG stands to benefit from this structural shift, supporting long-term revenue and earnings growth.
  
• AFG has successfully diversified its income streams beyond residential mortgage aggregation into commercial lending, asset finance, loan manufacturing, white label products, and recurring broker subscription services-resulting in nearly 75% of income now being annuity-style, which enhances revenue predictability and reduces sensitivity to housing cycles.
  
• Substantial investment in technology, including BrokerEngine Plus and back-office platforms, has led to operational efficiency gains, lower cost-to-income ratios, enhanced broker retention, and higher productivity, all of which support net margin expansion and scalable earnings over time.
  
• Strategic acquisitions and investments (such as expanded broker investments, the Thinktank stake, and consolidation of larger broker groups) position AFG to capture additional market share, benefit from ongoing industry consolidation, and create new recurring revenue streams, strengthening its long-term competitive position and supporting steady earnings growth.
  
• Favorable macro and demographic trends-such as strong population growth, ongoing urbanisation, and constrained housing supply in Australia-are projected to sustain underlying demand for residential and commercial property finance over the long term, underpinning loan book growth, fee income, and the company's overall earning power.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of A$2.57 for Australian Finance 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 A$3.01, and the most bearish reporting a price target of just A$2.3.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be A$1.5 billion, earnings will come to A$66.0 million, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 12.1%.
• Given the current share price of A$1.69, the analyst price target of A$2.57 is 34.4% 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.