Is Bank Millennium SA. (WSE:MIL) Expensive For A Reason? A Look At The Intrinsic Value
Pricing MIL, a financial stock, can be difficult since these banks have cash flows that are affected by regulations that are not imposed upon other sectors. 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. Emphasizing factors such as book values, in addition to the return and cost of equity, is beneficial for estimating MIL’s intrinsic value. Today we will look at how to value MIL in a reasonably useful and easy method. View our latest analysis for Bank Millennium
What Is The Excess Return Model?
Let’s keep in mind two things – regulation and type of assets. Financial firms operating in Poland face strict financial regulation. In addition to this, banks generally don’t possess large amounts of tangible assets as part of total assets. As traditional valuation models put weight on inputs such as capex and depreciation, which is less meaningful for finacial firms, the Excess Return model places importance on forecasting stable earnings and book values.
Deriving MIL’s True Value
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)
= (9.82% – 11.34%) * PLN7.74 = PLN-0.12
Excess Return Per Share is used to calculate the terminal value of MIL, 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)
= PLN-0.12 / (11.34% – 3.33%) = PLN-1.47
Putting this all together, we get the value of MIL’s share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= PLN7.74 + PLN-1.47 = PLN6.27
Relative to the present share price of PLN8.18, MIL is , at this time, priced above its true value. Therefore, there’s no benefit to buying MIL today. Pricing is one part of the analysis of your potential investment in MIL. Analyzing fundamental factors are equally important when it comes to determining if MIL has a place in your holdings.
Next Steps:
For banks, there are three key aspects you should look at:
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.
Future earnings: What does the market think of MIL going forward? Our analyst growth expectation chart helps visualize MIL’s growth potential over the upcoming years.
Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether MIL is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on MIL 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.
