Value and Recommendation
To value Dolla Financial Services we employed 3 valuation methods, namely the 2 relative P/E multiple valuations, and the justified P/B valuation. Our average valuation from the methods resulted in a range of $1.50 to $2.35 based on its current standing and growth prospects, resulting in an average price target of $1.93.
P/PBT and P/E Multiple Valuation
Our P/PBT valuation is a variation of the P/E valuation that incorporates the profit before taxation measure, as opposed to the net profit measure. This was deemed appropriate since Junior Market listings have 5 years of tax-free reporting once listed. To determine an appropriate multiple, we reviewed: recently listed companies and their listing price multiples as well as Dolla Financial’s current multiples, and potential growth scenarios for the company with base, downside, and upside cases. Our base case sees Dolla Financial growing Profit before tax on a 1-year basis, by 70%, giving us a valuation of $1.70 at its current P/PBT multiple of 11.54x, and $2.35 at a multiple of 15.95x, the average of recently listed entities. Our P/E valuation sees the company being valued at $1.75 based on our growth expectation along with its current trailing multiple at 14.07x, and a price of $2.25 using the P/E multiple of recently listed entities at 18.13x.
Justified P/PB Valuation
The justified P/B was used to provide a fundamental approach to determine an appropriate multiple for Dolla. We note that the method typically uses the most recent return on equity (ROE). Given the high growth of the Company, however, and its relatively small equity base, ROE on a trailing basis was 90%. We, therefore, opted to use an average of the prior 3 financial years, which resulted in an ROE of 59%. For our cost of equity, a build-up method was used to determine the cost of equity of 18.84%, and a long-term growth rate of 10.79% was utilized.
We projected the company’s book value per share growth based on the potential retained earnings the company will generate in base, upside and downside case scenarios. We estimated a 1-year book value of $0.35, and paired with our justified price to book multiple of 6.01x to arrive at a valuation of $2.08. Finally, we acknowledge that the valuation process is both an art and a science. To that end, we’ve produced the accompanying chart which shows the range of valuation outcomes based on the specified methodologies indicated above. At both the low and high end of these ranges, Dolla Financial Services is attractively priced at $1.00. Consequently, we recommend that investors PARTICIPATE in the offer, as the company has potential for significant growth due to its expansion and growth factors along with the company listing at favourable multiples relative to the market. The company expects to see continuous strong loan portfolio growth in Jamaica, and the next five years anticipate significant growth in its Guyana loan portfolio.
