Judo Capital Holdings Limited (JDO) – Beefed-up balance sheet

Judo Capital is a bank focused on lending to small- to medium-sized enterprises (SMEs). Judo Capital (JDO) has solidified its balance sheet via a $750 million note securitisation issue (upsized from $500 million due to strong demand) backed by its loans, sending shares in the lender to small- to medium-sized enterprises (SMEs) up more than 12% on the day. The issue was priced at 171 basis points (bp) over the one-month bank-bill swap rate (BBSW), a much tighter outcome than the 273bp margin over BBSW than Judo’s initial transaction in September 2023.

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In Ord Minnett's view, the securitisation issue, which boosts Judo's key common equity tier-one (CET1) capital ratio on a pro forma basis to 13.2% at 31 March, versus a reported CET1 ratio of 12.6%, should allay investor concerns the lender would have to tap shareholders in an equity issue to bolster its balance sheet. We now forecast a CET1 ratio of 12.6% at 30 June, comfortably above we see as investors’ comfort level of circa 12%. The securitisation issue found strong support from both local and foreign investors, superannuation funds, fixed-income and credit funds, and bank balance-sheet buyers, suggesting the transaction has opened up a new capital-efficient avenue of funding for Judo, albeit at a higher cost than wholesale. The benefits of releasing regulatory capital and passing credit risk to third-party investors should also allow Judo to generate higher return on equity (ROE).

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Post the issue, we have nudged our FY26 EPS up 0.1%, while our FY27 and FY28 forecasts are reduced by 1.4% and 1.3%, respectively, to incorporate the impact on net interest margin (NIM) from the higher-than-wholesale funding costs. Judo is highly exposed to broader macroeconomic conditions and its performance will be more volatile than most of its larger rivals. It is thus strongly leveraged to any Middle East war resolution and a return to calmer energy markets that had potentially threatened the asset quality of its SME loan book. We forecast a compound annual growth rate of (CAGR) for EPS of 40% and view Judo as an appealing investment option on a medium-term outlook. This leads Ord Minnett to maintain its target price of $2.40 on Judo and reiterate our Buy recommendation.