Pepper Money Upgrades Despite Market Pressure

This story features PEPPER MONEY LIMITED. For more info SHARE ANALYSIS: PPM

Increased mortgage margin impact in the second half wasn’t enough to halt a $15m upgrade to full-year cash earnings guidance for Pepper Money.

-In an early indicator of FY21 results, Pepper Money increased cash earnings guidance more than $15m
-The upgrade comes amidst indicators of mortgage competition impacts in the second half

By Danielle Austin

Despite margin pressure having widespread impact on the mortgage sector in 2021, non-bank lender Pepper Money ((PPM)) has upgraded full-year cash earnings guidance by more than $15m ahead of its first full-year result release since its initial public listing.

The company is now guiding to cash earnings of $135-138m, a significant jump from the more than $120.7m guidance provided in its initial public offering prospectus.

Industry analysts note a strong year of loan originations for Pepper Money has supported cash earnings, with the company suggesting it will achieve around $8bn in originations for the year compared to the approximate $6.6bn guidance from the IPO prospectus. The company already reported $6.7bn in originations for the year-to-date in the third quarter, and at this level Pepper Money’s originations are on track to exceed its FY18 record.

Pressure in the market

The impacts of mortgage market pressure have continued to surface in recent market updates from banks. Legacy banks in particular have noted impact from increased competition by non-bank lenders and an increasingly digitised sector.

The widespread impact of larger than anticipated margin declines in the lending sector, driven by high borrower movement and competitive fixed mortgage rates, has been highlighted by recent results in banking. Despite not offering fixed rate mortgages, Pepper Money’s margins felt the sector pressure in the second half, falling around -20 basis points below first half results. Analysts expect competition will remain intense in the foreseeable future, and continue to cause a drag on margins.

Goldman Sachs retains a Buy rating and increases its target price to $3.56 from $3.47.

Macquarie retains an Outperform rating and decreases its target price to $3.10 from $3.25. Macquarie analysts noted an improving economic environment was expected to outweigh medium-term margin pressure headwinds.

Credit Suisse retains an Outperform rating and decreases its target price to $3.05 from $3.35. The broker expects Pepper Money will be able to increase bottom line growth over FY22 and FY23.

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