Wednesday, September 29, 2021 06:00 AM / by Proshare Research/ Header Image Credit: EcoGraphics
Proshare analysts adopted an earnings approach to the valuation of FBNH in the absence of annual dividends that would have allowed the analysts to value the company based on how much the company had paid its shareholders over the last five years. The analysts noted that other market professionals might object to the use of the discount factor and prefer a market-multiple approach. However, to avoid the arbitrariness associated with determining the riskiness of FBNH's business and the appropriate discount factor, they chose not to estimate future earnings discounted by the company's weighted cost of capital.
As an alternative, FBNH's average maintainable earnings was discounted in perpetuity at two different required rates of return, namely: a capitalisation rate of 35% and the July 2021 inflation rate of 17.38%, to find out if the equity of the institution had any hidden value or profit-taking opportunities.
In applying a capitalisation rate of 35% as the required rate of return, Proshare analysts used a discount factor of 2.86 compared to the inflation rate factor of 5.75.
The result was a fair value of N5.77, indicating a profit-taking opportunity. However, when an inflation rate of 17.38% was the required rate of return, it gave a fair value of N11.63 suggesting a potential hidden value of N4. Therefore, a pessimist would value the lender at roughly N6 per share, while an optimist would place it closer to N11 per share (see table 4 below).
Table 4: What the Data Says
Downloadable Versions of 100 Days After CBN's Board Removal: First Bank's Shaky House of Cards Report (PDF)
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2. Full Report: 100 Days After CBN's Board Removal: First Bank's Shaky House of Cards - September 19, 2021
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10. Memo to the Market - The NSE, Oscar Onyema Foundation and Corporate Governance - Aug 20, 2018, Olufemi Awoyemi, Proshare
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