Skye Bank Plc
Skye bank Plc, one of the listed banks on the floor of the NSE released its full year results last week. The company was able to surpass the earnings I projected when they released their half year results earlier in the year. It was a phenomenal success as they were able to generate a double digit growth in the face of the financial crises that generally rocked the banking sector during the last three quarters 2008.
They were able to grow turnover by 87.53% from the previous year from N41.7 billion to N78.2 billion; profit before tax grew by 173.41% from N7.9 billion to N21.6 billion while after tax profit jumped 175.86% from N5.8 billion to N16 billion. It is also noteworthy that dividends increased by 71.43% from 35K per share to 60K per share. This result go a long way to show that Skye bank has been able to use the funds they raised during their public offer judiciously to benefit their shareholders.
Skye bank currently has 11.59 billion shares outstanding and N68.8 billion of shareholders’ equity as released with the financial statements. Their earning per share comes up to N1.38 with a retention rate of 56.52% which signals a growth rate of 13.14% per annum. They have a book value of 5.94 per share.
At the current price of N8.32 per share, the price earning multiple is 6.03 with a price to book value of 1.40 and dividend yield of 7.21%. The price earning model gives a fair value of N27.59; the price to book value model yields N14.84, while the dividend yield model generates an intrinsic value of N24.
The average of the three models gives an intrinsic value of N22.15.
Given the current trend of the stock market, it might be quite difficult for the price to hit that value in the current future, but the essence of this analysis is to show that Skye bank has the capacity to generate a mouth watering return on investment in the short, long and medium term investment horizons. Their ability to withstand the stress of the economic crises during 2008 also places it in an enviable position among its peers. This conjecture is based on the relative price based on the other stock on the exchange.
The absolute price model, the Gordon pricing model incorporating the Capital Asset Pricing Model reveals another intrinsic value entirely. The assumptions incorporated into this model include:
1. A risk free rate of 11.75% (which was gotten from the average of 10% from bank deposit rates and treasury rates of 13.5%)
2. Skye bank will be able to grow their dividend payment in the next financial year by 71% like they did this year (which may be slightly optimistic)
3. Data available for use were just for two years, 2007 – 2008, which might inflate the values a little bit
The correlation between the returns of investing in Skye bank and the stock market as a whole was 1, meaning that there is a perfect linear relationship between Skye bank and the market. Skye bank beta was found to be 2.15, meaning that the risk associated with investing in Skye bank is higher than with the market. It tends to give exaggerated higher returns than the market when the going is good and lower returns when the market is bad.
The absolute pricing method gave an intrinsic value of N6.03.
Does this mean that the stock market is still overpriced even at its current low levels? I guess we have an opportunity for academicians to give us more insight into this.