Valuation
To value NCB we opted to use a residual income model and a market-based Price- to-Book approach. The latter was utilized to incorporate into our analysis the possible scenario of sentiment, which has been fairly-negative for the sector for the majority of the last two (2) years, failing to improve, resulting in the current trading multiple remaining over the next year.
We utilized several assumptions for the residual income model, in arriving at our projections of total comprehensive income form the financial year 2024. The first of which is positive but slowed economic growth, which impacts business lines such as commissions and fee income, as well as insurance premium growth. We also assumed that the financial markets, particularly the debt markets, notablymthe market for Jamaica Government securities, will see a better price performance in 2024 relative to 2023 as we expect that by mid to late 2024, there will be a concerted global push towards less restrictive monetary policy. Given these assumptions, along with a cost of equity of 12.27%, we arrive at a multi-stage residual income model valuation for NCB of $83.12.
To supplement this valuation, we applied the peer-average P/B of 1.23x to NCB to our forecast of the book value for the end of the 2024 financial year. Given our macroeconomic and capital market assumptions that fed into the total comprehensive income forecast for NCB as well as an expectation of a normalization of dividends and the impending dilution resulting from a successful close of the APO, we arrive at a forecasted book value per share of $64.82 at the end of the 2024 financial year. Currently, the stock trades at a multiple of roughly 1.00x book value, hence in the scenario that sentiment does not improve, this would give us a fair value target of $79.63. As such, our current fair value target price rangemis $79.63-$83.12, with a final target arrived at by taking the simple average of $81.37.
Based on an offer price of $65.00, we estimate a one-year total potential upside of 25.19%. As such, we recommend that investors participate in the APO. Further, investors should take note that the stock has been trading below the APO offer price, which might be a consideration in investors’ decision process.
