Shares in Judo Capital Holdings Ltd (ASX: JDO) copped an absolute shellacking last week when the company downgraded its profit expectations and upped its cost of risk substantially.
The shares fell more than 40% in the session last Thursday and have failed to recover substantially since then.
So are they now going for a bargain? The team at Morgans seems to think so. We'll get to their analysis and price target for the company shortly.
First, let's look at what the company announced.
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Tough times for the challenger bank
Judo said in its statement to the ASX last week that its cost of risk would now be $116-$122 million, "reflecting an increase in specific provisions primarily driven by three exposures across different sectors that have recently emerged, as a result of customer specific developments''.
Judo said it now expected profit before tax to be $163-$169 million, or about 30% up on FY25. This is down from previous guidance of $180-$190 million.
The company also said profit in FY27 was expected to be $210-$220 million, up another 30%, "as the Bank continues to deliver strong growth and operating leverage during a period of economic uncertainty''.
Judo Chief Executive Officer Chris Bayliss said:
We continue to see strong underlying momentum in the business. Recent credit outcomes have been driven by a small number of customers, who we are actively working with. These exposures have deteriorated subsequent to the customer-by-customer review undertaken in the third quarter and reflect recent, borrower-specific developments. "While today's update is partly a result of the macro environment, it is nevertheless disappointing. Regardless, we remain confident in the strength of our underlying business and the quality of the portfolio. We have a proven customer value proposition, are profitable and well capitalised, and have a clear path to achieving a return on equity in the low-to-mid teens.
Shares looking cheap
Morgans has this week released a research note looking at Judo and said the share price decline after the announcement was "vicious" especially considering the weakness in the share price since February.
The analyst team said Judo's forecast for FY27 earnings was materially below consensus forecasts of $255 million, and said, "the miss is more stark when considering that two years ago consensus was expecting $291 million profit before tax for FY27''.
The analysts said they had cut their price target for Judo Capital shares by 32% to $1.47, which is still well above the current level of 91 cents.
They added:
Short-term target price $1.47/share, but we think by the end of this decade JDO could be worth over $2/share. JDO is higher risk and more cyclically exposed than the major banks but investors are compensated by higher potential returns at current prices.
