Now for those who may want to learn some basics on investing I have some case studies here only problem or maybe advantage is this are US listed stocks and for a change we be looking at a Kenyan listed stock goes by the name CFC Stanbic bank. you will realize that my valuation changes overtime that is because I believe there is no formula in valuing stocks, I see people stuck on finding the holy grail of investing with precise numbers, the truth is there is no holy grail, in value investing we are stuck in estimated intrinsic value, keyword here is estimated that tell you the art form involved in value investing.
A bank is a very funny animal and at best I avoid it but let me look at this from a private owners point of view, now when you buy a companies stock what you are actually buying is the equity, what is equity? to put it simple in a balance sheet for it to balance you less total liabilities from total assets what is left over is the equity,add equity and total liabilities and they equal total assets in theory that’s how a balance sheet balances.So how does a bank make money,customers deposit their money and your equity which the bank uses to finance its assets, which include loans,investments,takeovers and many others.Since equity and liabilities finance the assets what you need to really know is how much of those assets you are financing the lower the better. its for this reason that financial companies are better evaluated from an equity/asset ratio not debt/equity ratio. CFC seems to have it at 19% higher is safer, but that’s pretty conservative. A look at cash flow on average for the last five years they have been growing at 60% yet investors have valued the same earnings at only 8 times why could this be, a look at what is funding these assets seem well in place CFC which has assets totaling 170 billion shillings less intangibles and its customer deposits which grew by 25% stood at 95 billion this is not even counting other bank deposits that stood at 35 billion. What this means is that CFC has more than enough cheap deposit to fund is assets,how cheap well the bank will probably pay you 2-3% for your deposits yet it can take the same deposits and loan out for 13% even to be more conservative, they can take the deposits and purchase the government ten year bond that currently yields 12.78% which we refer to as the risk free yield. CFC deposits to assets ratio stands at 76% less intangibles and if we less the deposits from banks the ratio is still high at 55%,Warren Buffett favorite bank Wells Fargo has deposits to asset ratio of 70%.
CFC interest income unlike most of the banks in Kenya amounted to 47% of cash flow where non interest income came in at 53% and this is where in my estimation the bank may reap most, in theory as the stock market is heavily influenced by foreign investors they need an investment bank on the ground that can execute their trades due to its affiliated relations with standard bank international it goes without saying who is taking a huge chunk of this foreign influx to the Kenyan stock market,then again as CMA has put its foot forward to educate the local citizens on how to trade in the stock market this segment might be poised to increase as at least the 4% of the Kenyan population that invests in the stock market increases to say 7-10%.
If we were to less the annual maintenance expenditure from current cash flow and put it that CFC will not do better than the current cash flow, current free cash flow stands at 6.2 billion at a discount rate of 30% which is very conservative since CFC has grown operating income at an average of 60% for the last five years the net present value of the free cash flow comes in at 18 billion over a span of 5 years, but what about at 15% discount rate the NPV of free cash flow comes in at 30 billion. so how much would you pay for this free cash flow today, or even a better question what would a knowledgeable businessman pay for this cash flow today which are grew at an average 60% over the last five years, my estimate would be in the 20’s to 30’s, so at a discount rate of 30% which is more than double the risk free yield, my estimated free cash flow is 18 billion which means that CFC will have more than doubled its current free cash flow, exactly why investors seem to have given CFC a valuation of less than 8 times its current earnings, could be that the stock price which stands at 126 or just pure plain ignorance, here people want a stock selling for single digits so if you look higher up you might just find a diamond in the value rough, and CFC could do even better by just reducing its other expenditures which equal employees labor cost on a one to one basis. So what is the value of CFC you cant pin it down to a single number all I know is that its worth at least double and since buying 1 dollar for 50 cents has always been a winning game to me this cash flows are worth at least a PE of 15 that means a near price of 215. With the derivatives market this would have been better with options long term options or leaps. More on the blog valueinvestingkenya.wordpress.com