Our R180 target price is calculated using a tNAV-based valuation approach, which can be summarised as follows:
• We forecast tNAV per share and return on tNAV.
• We use the average return over the next 3 forecast years as a proxy for the "sustainable return on tNAV".
• We divide this sustainable return less terminal growth by the cost of equity less terminal growth in order to arrive at a target multiple to tNAV. Our estimate of cost of equity is a function of our assessment of the risk inherent in the company.
• We multiply this "target multiple to tNAV" with our forecast tNAV per share at the end of year 3 to arrive at a fair value per share at the end of year 3.
• We use the company's cost of equity to present this value per share at the end of year 3, as well as all the dividends that will be paid over the next three years. The result is our current valuation estimate.
• We roll the current valuation forward 12 months at the cost of equity, and subtract the next 12 months of dividends to be paid, to arrive at a 12 month target price.

The risks to the Absa investment case and target price are company-specific, macro-environment related, and regulatory.

Company-specific:
While we have modelled for credit costs above the top-end of management's targets, there remains a risk that credit losses may rise.

It is also possible that Absa might be more/less aggressive on cost containment than anticpated, representing upside/downside risk to our thesis.

Macro environment:
The macroeconomic outlook remains uncertain with respect to energy prices and other commodities, volatile politics, and the weak fiscal position of governments in a number of Absa's markets. A worse or better macro outcome than anticipated could lead to worse or better financial performance resulting in worse or better share price performance than anticipated.

An increasing risk for SA banks is that of competition. We consider the risk most acute in retail transactional banking over the near term, but likely to spread to retail lending and deposit products over time. We view Absa as less vulnerable than peers due to its focus on the RBB turnaround and above-peer loan growth.

Regulatory:
Banking is a highly regulated business and unanticipated changes in the regulatory landscape could either negatively or positively impact the bank's financial performance and share price.

If the impact on the company from any of these factors proves to be more negative than we anticipate, the stock will likely have difficulty achieving our financial and price targets.