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Investors Are Undervaluing DBS Group Holdings Ltd (SGX:D05) By 11.86%

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Pricing bank stocks such as D05 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. For example, banks are required to hold more capital to reduce the risk to depositors. Focusing on factors like book values, in addition to the return and cost of equity, can be useful for computing D05’s value. Below I’ll take you through how to value D05 in a fairly useful and straightforward way.

See our latest analysis for DBS Group Holdings

Why Excess Return Model?

Let’s keep in mind two things – regulation and type of assets. The regulatory environment in Singapore is fairly rigorous. In addition, banks generally don’t possess large portions of physical assets on their balance sheet. This means the Excess Returns model is best suited for calculating the intrinsic value of D05 rather than the traditional discounted cash flow model, which has more emphasis on things like capital expenditure and depreciation.

SGX:D05 Intrinsic Value Export February 19th 19
SGX:D05 Intrinsic Value Export February 19th 19

The Calculation

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 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)

= (0.13% – 9.8%) x SGD20.52 = SGD0.61

Excess Return Per Share is used to calculate the terminal value of D05, 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)

= SGD0.61 / (9.8% – 2.3%) = SGD8.07

These factors are combined to calculate the true value of D05’s stock:

Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share

= SGD20.52 + SGD8.07 = SGD28.59

This results in an intrinsic value of SGD28.59. Relative to today’s price of S$25.20, D05 is , at this time, trading in-line with its true value. This means D05 isn’t an attractive buy right now. Valuation is only one part of your investment analysis for whether to buy or sell D05. Analyzing fundamental factors are equally important when it comes to determining if D05 has a place in your holdings.

Next Steps:

For banks, there are three key aspects you should look at:

  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.

  2. Future earnings: What does the market think of D05 going forward? Our analyst growth expectation chart helps visualize D05’s growth potential over the upcoming years.

  3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether D05 is a dividend Rockstar with our historical and future dividend analysis.

For more details and sources, take a look at our full calculation on D05 here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. On rare occasion, data errors may occur. Thank you for reading.

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