It has won many awards, and now Pepper has won over a veteran fundie too

The holy grail for investors is a company that grows its earnings year after year, regardless of the economic cycle, says Romano Sala Tenna – and the fundie believes he has found just that.

In May, the average price-to-earnings (P/E) ratio for the financial services industry was a high 16.9x while Pepper Money (ASX: PPM) was trading at a FY22 P/E multiple of just 6.4x.

The company is now trading at a trailing P/E ratio of 4.69x, representing even better value.

Declaring a complete mismatch between the company’s high growth rate and low P/E ratio, Katana Asset Management’s Mr Sala Tenna labelled financial services provider Pepper Money a “structural growth story”, noting its ‘holy grail’ qualities.

Beyond this, the fund manager noted that out of the nearly 600 non-bank financial institutions in Australia, Pepper Money has won Best Non-Bank of the Year three times (2017, 2019 and 2021) at the Australian Mortgage Awards. It has also won Best Specialist Lender nine years in a row at RFi Group’s Australian Lending Awards.

Referencing this recognition, Mr Sala Tenna said “the single most important thing in business is a great customer experience” – which he believes is one of the reasons why Pepper Money has grown its earnings by over 21% compound annual growth rate (CAGR) during the past eight years, putting it in the top 2%-3% of companies in Australia on that metric.

Another important metric to value lenders is the net interest margin (NIM), a key profitability indicator that represents the interest charged on money lent out, minus interest paid on deposits and money borrowed.

While down from 2.52% in 2H CY21, Pepper Money achieved a NIM of 2.29% for 1H CY22, well in front of Commonwealth Bank’s 1.9% NIM for FY22. The veteran fundie suggested the market would be closely watching the company’s future performance in the current rising interest rate environment.

Speaking at a The Insider: Meet the Fund Manager session in May, Mr Sala Tenna praised a number of Pepper Money’s metrics, saying return on equity was a strong 25% in FY21, 23% in FY22 and is conservatively forecasted at 21% for FY23. 

In line with the ESG targets Pepper Money has committed to, the company is now the largest financier of electric vehicles in Australia after having financed 11% of all EVs in CY21, and has $300 million in social bonds as well as $330 million in green bonds as at 1H CY22.

The company has attracted analyst coverage from Paul Buys at Credit Suisse (price target: $2), Joshua Freiman at Macquarie (price target: $1.70) and John Hynd from Wilsons (price target: $2.50).

Click here to view more videos from Romano Sala Tenna’s The Insider: Meet the Fund Manager session.

Reach does not assume responsibility for the accuracy or completeness of any information provided, and the views expressed are not reflective of Reach Markets’ position. Any advice contained within this presentation is general advice and does not consider your personal circumstances, you should consider whether it is appropriate for you. 

The information we are giving you is for educational purposes only. “Investing is about understanding your risk” and every time you invest in the share market there is a risk of loss.

Past performance is not a reliable indicator of future performance.