In This Article:
Valuing B2H, a financial stock, can be daunting since consumer financials generally have cash flows that are impacted by regulations that are not imposed upon other industries. These lenders, for example, must hold certain levels of capital in order to maintain a safe cash cushion. Focusing on factors such as book values, on top of the return and cost of equity, is useful for computing B2H’s true value. Today I will take you through how to value B2H in a relatively effective and easy way. Check out our latest analysis for B2 Holding
What Is The Excess Return Model?
Before we begin, remember that financial stocks differ in terms of regulation and balance sheet composition. The regulatory environment in Norway is fairly rigorous. In addition, consumer financials tend to not have large portions of physical assets on their balance sheet. So the Excess Returns model is suitable for determining the intrinsic value of B2H rather than the traditional discounted cash flow model, which places emphasis on factors such as depreciation and capex.
How Does It Work?
The key belief for this model is, the value of the company is how much money it can generate from its current level of equity capital, in excess of the cost of that capital. The returns above the cost of equity is known as excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (22.64% – 10.85%) * NOK11.95 = NOK1.41
Excess Return Per Share is used to calculate the terminal value of B2H, which is how much the business is expected to continue to generate over the upcoming years, in perpetuity. This is a common component of discounted cash flow models:
Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)
= NOK1.41 / (10.85% – 1.99%) = NOK15.88
Putting this all together, we get the value of B2H’s share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= NOK11.95 + NOK15.88 = NOK27.83
Given B2H’s current share price of NOK19.08, B2H is priced beneath its true value. Therefore, there is potential room to profit from mispricing if you bought B2H at NOK27.83. Valuation is only one side of the coin when you’re looking to invest, or sell, B2H. Fundamental factors are key to determining if B2H fits with the rest of your portfolio holdings.
Next Steps:
For consumer financials, there are three key aspects you should look at:
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Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like leverage and risk.
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Future earnings: What does the market think of B2H going forward? Our analyst growth expectation chart helps visualize B2H’s growth potential over the upcoming years.
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Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether B2H is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on B2H here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.