COG Financial Firing On All Cylinders

Small Caps | 10:00 AM

Analysts forecast solid earnings growth for all divisions of COG Financial Services over FY26-27.

• COG Financial an emerging leader in leasing & packaging post recent acquisitions
• Already the leading finance broker and aggregator for SMEs
• Improving credit demand to drive earnings
• Regulation driving rapid EV leasing growth

By Greg Peel

COG Financial Services ((COG)) by its own claim is Australia’s leading finance broker aggregator and equipment leasing business for small to medium-sized enterprises (SME).

COG, with a market capitalisation of circa $420m, is a mid-cap financial company operating across three main segments:

 (1) Novated Leasing and Salary Packaging – COG is an emerging leader in this industry. The business is capital light as COG facilitates three-way arrangements between funders, motorists and their employers.

(2) Finance, Broking and Aggregation – COG is a leading broker of commercial asset finance. The company leverages its scale to maximise profitability.

(3) Asset Management and Lending – COG writes SME equipment loans on balance sheet and also operates funds that invest in commercial loans.

Leasing & Packaging

COG Financial expanded into the novated leasing and salary packaging game by increasing its stake in Fleet Network in October to 92.4%, having recently acquired EasiFleet. The $23.9m increase in stake was funded in part by a $20m equity raising at $2.00 per share.

Ord Minnett noted at the time the investment aligns with management's strategy to expand its exposure to salary packaging and novated leasing, with the deal expected to be around 6% earnings per share accretive in FY26. The purchase price implied a trailing 6.1x earnings (EBITDA) multiple, viewed by Ord Minnett as reasonable versus peers.

Ord Minnett increased its price target for COG to $2.40 from $2.04 but downgraded its rating to Hold from Accumulate given the share price run to that point – more than doubling between April and October.

Morgans retained its Accumulate rating while lifting its target to $2.63 from $2.14, noting the EasiFleet and Fleet Network acquisitions combined had boosted earnings per share (after amortisation) by 13-14%, with the novated segment expected to deliver 10% annual growth.

Path to Earnings Growth

Taking a closer look at COG last month, Bell Potter decided all business units were “back in gear” and the company could return to broad-based growth. Acquisitions should contribute 13% accretion, meaning COG needs another 17% to hit targeted 30% growth in FY26.

Bell Potter believes this is possible. Things continue to improve and now all three divisions are placed to have a positive impact.

COG’s FY25 profit in insurance broking suffered an implied -$0.5m headwind despite the broker footprint being unchanged. A rebound in volumes should be supportive, Bell Potter suggests, especially given the experience of COG’s board. Normalisation alone would translate to 2% earnings uplift.

With regard credit broking and aggregation, Bell Potter notes national September quarter business credit demand grew 3% year on year with asset finance applications up 1%. Rising commercial insolvencies have weighed on credit demand, led by construction, but the quarter saw its first year on year decline observed since 2021.

Meanwhile, small businesses in Queensland, South Australia and Western Australia printed 5% increases in credit demand. Victoria remains a laggard that continues to contract but the state progressed to an improved position, down -1% in the September quarter versus -3% in the June quarter. Bell Potter observed three consecutive quarters of good growth in line with easing monetary policy.

The broking and aggregation business is highly sensitive to interest rates. Bell Potter noted the futures curve had flattened, incorporating -12 basis points of easing and implying an average FY26 rate of 3.61%.

We have since had another RBA meeting, at which Michele Bullock implied rates would remain unchanged for the foreseeable future, which is consistent with a 3.61% average for FY26. There is nonetheless a risk a rate hike may be necessary. Some economists believe a hike in February has become a genuine possibility.

Yet the full effect of prior rate cuts is still to play out given the typical lag. Average FY25 rates were 4.24% and in line with FY24. Bell Potter points out this equates to 5% in broking & aggregation earnings growth alone. Rates are further supporting mortgage applications which are now seeing double-digit growth.

With regard novated leasing, Bell Potter notes vehicle imports have printed their first increase since May 2024. This should lead to restocking in FY26. Private buyer activity is solid, and battery EV sales are growing 70% year on year (ex-Tesla).

COG disclosed 18 tender wins providing access to 88,000 employees. Bell Potter believes this equates to 18% settlement growth assuming an average lease duration of three years which should come through from FY27 on refinancing.

Putting it all together, Bell Potter re-iterated its Buy recommendation and $2.70 target for COG.

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