It was the Tuesday that shares Judo Capital (ASX: JDO) retraced to an all-time low of $1.55 a pop, with local markets feeling the end of the stick as US markets continued to shake in the face of Chinese lockdowns and rising inflation.
So Wednesday was not the right time for judo to hold its inaugural strategy day.
With JDO shares down more than 20% in trade year-to-date, CEO and co-founder Joseph Healy could have been forgiven for taking a sudden dose of Omicron instead of presenting to analysts and to stakeholders the perspectives of Judo.
And yet, once the conversation was over, the uprising began. JDO shares, which left for all the money hours earlier, kicked off as their namesake.
Around 2:30 p.m. Sydenham time, judo was almost 7% higher. The buying continued on Thursday, hitting $1.77 and closing around 6% the better.
The secret sauce
At his Investor Day on Wednesday, Chris Bayliss, Deputy Chief Executive and Chief Financial Officer, discussed JDO’s net interest margins (NIMs), saying that while they might be bad news for most stocks, the rise interest rates provides strong leverage to Judo’s funding strategy targeting more than 3%, to be locked in at a fixed rate.
“The outlook for continued increases in cash rates provides a significant tailwind to our margins given that our loan book is largely floating rate, while our funding costs are mostly fixed.”
“In addition to accessing fixed rate funding from the RBA Term Funding Facility, Term Deposits remain a very attractive source of funding. We reward retail depositors with some of the most competitive term deposit rates in the market.
“At the same time, by using hedges, we are locking our funding margins well below the levels required to deliver our large-scale NIM of over 3%.”
Tremendous. Here’s what the brokers said about the presentation:
Citi: JDO is rated neutral
Judo Capital Holdings’ Strategy Day reveals the company is ahead of the prospectus.
Citi notes that Judo deliberately ran an uncovered balance sheet mismatch and expects this to result in strong, albeit short-lived, net interest margins at 3.6% in the June 2023 half. compared to 1.90% at the end of December 2021 first half.
However, the improved revenue outlook will be offset by rising costs.
Purchase note retained. The target price is reduced to $1.90 from $2.40. (current price is $1.72)
Macquarie: JDO rates as upgrade to outperform from neutral
Following the investor press, Macquarie brokers saw a number of investor-friendly signals, but mainly:
- JDO is well positioned to deliver on its promise over the next three years and appears to be praising Judo for pre-funding growth by hiring more bankers – around 20 hires – accelerating well beyond expectations, up around 12%.
- After a rough run – the stock is down 20% in six months, brokers say the ensuing downgrade has made the risk-reward profile so much more attractive to investors
The rating is upgraded and the target price also increases: up 5 cents to $2.15 from $2.10.
Credit Suisse: JDO notes outperformance
Credit Suisse says opacity around the company’s interest rate exposure played a role in JDO’s share price tumble, but since the presso they’ve been building some momentum .
Rising interest rates will provide JDO with significant tailwinds: “With 91% of lending tied to the bank note swap rate, it foresees immediate benefits from increases in cash rates.”
CEO and co-founder Joseph Healy expects “superior results” for risk management strategies, looks forward to a positive funding market outlook and hints at a working model to create “sustainable competitive advantages “.
“Judo Bank is a young company with strong growth ambitions. Our performance since the beginning of the year shows that we have strong momentum. We continue to generate strong loan growth and remain confident in achieving our prospectus guidance for GLA of $6.0 billion by June 30, 2022,” Healy said.
The rating (outperformance) and target price are stable at $2.75.