We value AFG using a blend of PE rel. to banks and DCF-based valuation to derive our target price of A$2.90.                

1) Relative valuation – AFG’s PE relative to peers: we assume 18.5x FY26E PE. We expect AFG to have less earnings flexibility than banks in a potential downcycle. We hence apply a ~10% PE discount vs. the banks to arrive at 18.5x. This multiple is also broadly in-line with AFG’s historical peak multiple.     

2) DCF valuation: we use an ~11% cost of equity (4.3% RFR, 5.5% MRP, 1.20 beta) and a 2.5% terminal growth rate.

The main downside risks to achieving our target price reflect the inability to attract new brokers to the group, pressure on the share of commissions paid away, rising compliance and operating costs, pressure on industry broker commissions, adverse regulatory outcomes, and general macro shocks to the housing sector and household income. AFG is also exposed to funding risks around its securities business in renewing warehouse facilities and terming out transactions, interest rate risk, and mortgage price competition. Other risks include falls in the equity market, disappointment against market expectations for dividends and outlook statements.

We see the main upside risks to achieving our target price as more rapid broker franchise growth, rising productivity, improved industry lending commitments from refinancing and improved housing sentiment, stronger equity market performance, a fall in funding costs, and lessening of mortgage price competition.