Despite popular sentiment, rising interest rates do not benefit all finance ASX shares.
The big banks, certainly, enjoy rate rises as they have both borrowers and depositors as customers.
When the Reserve Bank cash rate increases, they often pass on the full change to its borrowers while only awarding a partial amount to the depositors.
This fattens up what is known as their net interest margin, which is the difference between what they pay out to depositors and the income they receive from borrowers.
But for those smaller players that are loan-only businesses, it’s a different picture.
Forager Funds, in a memo to clients, noted that rising interest rates “can affect customers’ ability to repay their loans” and inflate the cost of funding for the lenders.
“Fear of growing problems in this sector has sent share prices plummeting,” read the memo.
Performance ‘exceeded expectations’
Despite the stock price drop, the Forager team noted that the performance of the businesses has “exceeded expectations”.
The lending business is a race for scale.
“The expectation is for a small number of healthily profitable players to emerge over time and Wisr and Plenti look like two of them,” read the memo.
“March quarter reports showed Plenti’s loan book is already north of $1 billion and Wisr isn’t far away. They will both hit $2 billion over the next few years without dramatically increasing the rate of progress and that should enable them to be nicely profitable.”
‘Fear is overdone’ for Wisr and Plenti
The anxiety among investors for shares like Wisr and Plenti is, not so much the growth rate, but the hit to profitability from bad debts arising out of rising rates.
The Forager team acknowledged this “healthy scepticism is warranted”.
“But the fear is overdone,” read the report.
“Both these businesses are specifically targeting safer borrowers with a proven capacity to repay their loans. The March quarterly reports still showed default rates well below our long-run expectations.”
Forager also noted both Wisr and Plenti have indicated they will raise charges to customers.
“In any case, savings rates in Australia remain high and jobs plentiful,” the memo read.
“Economic conditions are absolutely going to deteriorate. But, while the portfolio weightings need to remain modest, we expect both businesses to successfully navigate and prove that their current share prices are far too low.”
The post 2 ASX shares with prices ‘far too low’ right now: Forager appeared first on The Motley Fool Australia.
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