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TBCG operates in the banking industry, which has characteristics that make it unique compared to other sectors. Understanding these differences is crucial when it comes to putting a value on the bank stock. Banks, for example, must hold certain levels of tiered capital in order to maintain a safe cash cushion. Examining factors like book values, as well as the return and cost of equity, is beneficial for estimating TBCG’s value. Today I’ll determine how to value TBCG in a reasonably effective and simple way. See our latest analysis for TBC Bank Group
Why Excess Return Model?
Two main things that set financial stocks apart from the rest are regulation and asset composition. The regulatory environment in United Kingdom is fairly rigorous. Moreover, banks usually do not hold significant amounts of physical assets on their books. 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 central belief for Excess Returns 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)
= (18.42% – 8.30%) * GEL46.76 = GEL4.73
Excess Return Per Share is used to calculate the terminal value of TBCG, 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)
= GEL4.73 / (8.30% – 1.49%) = GEL69.54
These factors are combined to calculate the true value of TBCG’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= GEL46.76 + GEL69.54 = £34.22
Given TBCG’s current share price of GEL15.78, TBCG is undervalued. Therefore, there is potential room to profit from mispricing if you bought TBCG at £34.22. Valuation is only one side of the coin when you’re looking to invest, or sell, TBCG. Analyzing fundamental factors are equally important when it comes to determining if TBCG has a place in your holdings.
Next Steps:
For banks, there are three key aspects you should look at:
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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 bad loans and customer deposits.
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2. Future earnings: What does the market think of TBCG going forward? Our analyst growth expectation chart helps visualize TBCG’s growth potential over the upcoming years.
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3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether TBCG is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on TBCG 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.