Valuing S68, a financial stock, can be daunting since these capital market firms generally have cash flows that are impacted by regulations that are not imposed upon other industries. Maintaining a certain level of cash capital ratio is common for these financial firms to abide by, in order to minimize risks to their shareholders. Examining elements such as book values, as well as the return and cost of equity, may be useful for evaluating S68’s true value. Below I’ll determine how to value S68 in a relatively accurate and simple approach. View our latest analysis for Singapore Exchange

What Model Should You Use?

There are two facets to consider: regulation and type of assets. Strict regulatory environment in Singapore’s finance industry reduces S68’s financial flexibility. Moreover, capital markets usually do not have substantial amounts of tangible assets on their balance sheet. While traditional DCF models emphasize on inputs such as capital expenditure and depreciation, which is less useful for a financial stock, the Excess Return model focuses on book values and stable earnings.

How Does It Work?

The key belief for this model is that equity value is how much the firm can earn, over and above its cost of equity, given the level of equity it has in the company at the moment. 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)

= (34.41% – 8.38%) * SGD1.08 = SGD0.28

We use this value to calculate the terminal value of the company, which is how much we expect the company to continue to earn every year, forever. This is a common component of discounted cash flow models:

Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)

= SGD0.28 / (8.38% – 1.88%) = SGD4.31

These factors are combined to calculate the true value of S68’s stock:

Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share

= SGD1.08 + SGD4.31 = SGD5.38

Compared to the current share price of SGD7.46, S68 is , at this time, priced higher than its intrinsic value. This means there’s no upside in buying S68 at its current price. Valuation is only one side of the coin when you’re looking to invest, or sell, S68. There are other important factors to keep in mind when assessing whether S68 is the right investment in your portfolio.

Next Steps:

For capital markets, there are three key aspects you should look at:

1. 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.

2. Future earnings: What does the market think of S68 going forward? Our analyst growth expectation chart helps visualize S68’s growth potential over the upcoming years.

3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether S68 is a dividend Rockstar with our historical and future dividend analysis.

For more details and sources, take a look at our full calculation on S68 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.