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Pricing bank stocks such as TOTG is particularly challenging. Given that these companies adhere to a different set of rules relative to other companies, their cash flows should also be valued differently. The tiered capital structure is common for banks to abide by, in order to ensure they maintain a sufficient level of cash for their customers. Focusing on data points like book values, with the return and cost of equity, can be practical for estimating TOTG’s valuation. Below I will take you through how to value TOTG in a relatively accurate and easy way. See our latest analysis for Totensrebank
What Is The Excess Return Model?
Before we begin, remember that financial stocks differ in terms of regulation and balance sheet composition. Norway’s financial regulatory environment is relatively strict. In addition, banks generally don’t have substantial amounts of tangible assets on their books. Excess Returns overcome some of these issues. Firstly, it doesn’t focus on factors such as capex and depreciation – relevant for tangible asset firms – but rather emphasize forecasting stable earnings and book values.
How Does It Work?
The central 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 in excess of cost of equity is called excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (10.92% – 8.40%) * NOK149.79 = NOK3.78
Excess Return Per Share is used to calculate the terminal value of TOTG, 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)
= NOK3.78 / (8.40% – 1.99%) = NOK59.05
Putting this all together, we get the value of TOTG’s share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= NOK149.79 + NOK59.05 = NOK208.84
Given TOTG’s current share price of NOK119, TOTG is , at this time, priced beneath its true value. This means there’s an upside to buying TOTG today. Pricing is only one aspect when you’re looking at whether to buy or sell TOTG. Fundamental factors are key to determining if TOTG fits with the rest of your portfolio holdings.
Next Steps:
For banks, 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 bad loans and customer deposits.
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Future earnings: What does the market think of TOTG going forward? Our analyst growth expectation chart helps visualize TOTG’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 TOTG is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on TOTG 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.