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| Fundamental Equity Research |
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Our Standard Warranted Equity Valuation (WEV) is based on the formula: Price/Book value = (Sustainable ROE - growth) / (Cost of equity - growth). We assume a sustainable return on equity of 13.6% and sustainable ROTE of 14.2%, a sustainable growth rate of 3% and a cost of equity of 13% and arrive at fair value of Zl 108.9 based on reported return on equity and Zl 109.7 based on ROTE. Our Economic Value Added valuation of Zl 113.2 per share is equal to the sum of the net present value of the bank's future economic value added (earnings adjusted for excess equity, less a capital charge reflecting the opportunity cost of capital). In accordance with the fair value derived from our WEV model based on ROTE, we set our TP at Zl 109.7.
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We rate the stock High Risk reflecting increased political risk after the unexpected outcome of the first round of the Presidential election, turbulent geopolitics, and rising risks that Poland’s highly profitable banking market may attract new players.
The following risk factors might impede the share price from reaching our target price: 1) The impact of the new potential regulations and litigations (including consumer loan litigations) may be more or less negative than we assume. 2) Macro economy may perform better or worse than anticipated and lead to higher or lower provisioning and slower or higher loan growth than anticipated. 3) Adverse movements in interest rates and bond yields could affect earnings. Specifically for Alior Bank we highlight the bank's cost of risk was very volatile over the last economic cycle. If the impact on the company from any of these factors proves to be less/more negative than we anticipate, the stock could materially outperform/underperform our target price |
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