On Tuesday, Citi adjusted its outlook on OneConnect Financial Technologies Co. Ltd. (NYSE:OCFT), reducing the stock's price target to $5.56 from the previous $7.00, while keeping a Buy rating on the shares. This change follows OneConnect's first-quarter financial results, which showed a narrower net loss from continuing operations and an improvement in net margin.
OneConnect reported a net loss from continuing operations of -RMB54 million in the first quarter of 2024, compared to -RMB72 million in the same quarter of the previous year.
This improvement was partly due to an increase in net financing income, which reached RMB6 million in the first quarter of 2024, compared to none in the first quarter of 2023. The company's net margin also improved, rising to -7.4% in the first quarter of 2024, a 0.7 percentage point year-over-year increase.
Despite these positive developments, OneConnect's revenue from continuing operations saw a decline of 19.1% year-over-year to RMB723 million in the first quarter of 2024. The decrease was attributed to weaker performance in implementation and transaction-based business revenues, which fell by 25% and 17.3% year-over-year, respectively.
The company's IFRS gross profit margin presented a mixed picture, with a slight quarter-over-quarter decrease of 0.7 percentage points in the first quarter of 2024, due to a high base effect. Still, the gross profit margin still showed a slight year-over-year increase of 0.2 percentage points, bolstered by the phasing out of products with lower margins and return on equity.
Citi's report also mentions that despite the expectation of a significant one-off gain from the divestment of PAOB in the second quarter of 2024, the firm has revised its earnings estimates for 2024 to 2026. The revision takes into account the substantial revenue and earnings impact from the decision of connected customers to stop using OneConnect's cloud service.
Consequently, the analyst anticipates a potential delay in the company achieving a sustainable breakeven point, now expected in 2026. Despite the reduced stock price target, Citi maintains a positive outlook on the stock, citing an over-penalized valuation and the potential for upside from possible shareholder returns.
InvestingPro Insights
OneConnect's financial health and market performance provide a nuanced picture for investors following Citi's updated outlook. With the company holding more cash than debt, as per InvestingPro Tips, it demonstrates a degree of financial stability despite the challenges it faces. Moreover, the stock is currently trading at a low Price / Book multiple of 0.23, which could signal an undervaluation relative to its book value assets. This aligns with Citi's view of an over-penalized valuation.
Still, the company's recent performance metrics raise concerns. OneConnect has experienced a significant revenue decline of 17.84% over the last twelve months as of Q1 2023, with a quarterly revenue drop of 25.58%. This supports Citi's revision of earnings estimates, reflecting the impact of lost cloud service customers.
Despite these setbacks, the stock has shown a strong return over the last month, with a 20.86% price total return, indicating some investor optimism or a potential market correction.
For investors looking to delve deeper into OneConnect's prospects, InvestingPro offers additional insights beyond these highlights. There are 15 more InvestingPro Tips available, which could guide investment decisions. To access these tips, consider using the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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