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Is There An Opportunity With KBC Group NV’s (EBR:KBC) Mispricing?

Pricing bank stocks such as KBC 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. Emphasizing line items like book values, with the return and cost of equity, is suitable for estimating KBC’s intrinsic value. Below I’ll take you through how to value KBC in a fairly accurate and straightforward approach.

See our latest analysis for KBC Group

What Model Should You Use?

There are two facets to consider: regulation and type of assets. The regulatory environment in Belgium is fairly rigorous. In addition, banks tend to not hold significant portions of physical assets on their books. The Excess Returns model overcomes the required capital kept on hand and lack of tangibles by focusing on forecasting stable earnings, rather than less relevant factors such as depreciation and capex, which more traditional models focus on.

ENXTBR:KBC Intrinsic Value Export November 16th 18
ENXTBR:KBC Intrinsic Value Export November 16th 18

Deriving KBC’s True Value

The key 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)

= (0.14% – 9.7%) x €43.67 = €1.81

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

= €1.81 / (9.7% – 0.9%) = €20.73

Putting this all together, we get the value of KBC’s share:

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

= €43.67 + €20.73 = €64.39

This results in an intrinsic value of €64.39. Compared to the current share price of €62.30, KBC is , at this time, priced in-line with its intrinsic value. Therefore, there’s a bit of a downside if you were to buy KBC today. Valuation is only one side of the coin when you’re looking to invest, or sell, KBC. Analyzing fundamental factors are equally important when it comes to determining if KBC 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 KBC going forward? Our analyst growth expectation chart helps visualize KBC’s growth potential over the upcoming years.

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

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

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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