Why Cost of Equity matters; RCBC - (RCB - P18.0) is a “win-win” stock
Cost of Equity - the simple logic
The expected return in putting money into the market is to earn more than the cost of equity (COE)). This is computed by adding the 365-days T-bill rate and the equity risk premium. In the case of the Philippines, its 7.8% plus 5% equity risk premium or roughly 12.8%. The logic here is that if you cannot earn more than the COE, you are better off parking your money in risk-free government securities. That's how the logic works. Investors should simplify their investment objectives by keeping this in mind.
Unfortunately, most people think that they have to hit the jackpot when they invest in the market. Even the Philippine Stock Exchange (PSE) came out with an ad telling investors that they can double their money in the market. Doubling or tripling your money in the market is incidental. In the end it is all about managing your risk. Three key points to remember:
1.) Rationalize your objective vis-à-vis other available investment alternatives
2.) Buy below the intrinsic value of the stock. This separates investors from speculators.
3.) Run your winners; cut your losers.
RCBC is a “win-win” stock
I took note of RCBC and I believe it is worth a second look.
RCBC currently trades at .9x Price to Book Value (P/BV). It is the cheapest stock in the banking sector. I find value in this since RCBC remains one of the top banks in the country. It ranks 7th and 10th respectively amongst local banks in terms of resources and capital
The banking sector trades at 1.6x P/BV. RCBC is the cheapest, while the next cheapest is Equitable PCI (EPCI - P74.50) at 1.3x P/BV. BPI (BPI - P49.0) - the proxy stock for the sector trades at 1.8x.
Both RCBC and EPCI are in the same boat. For the past 5 years, growth has stalled and asset quality has deteriorated. Both banks badly need to recapitalize. The difference is that EPCI has found a white knight in Banco de Oro (BDO). I think it's a matter of time before RCBC can find one.
So on the downside - or in this case, at the minimum, I think RCBC should trade closer to its book value of P20.50. This should give me a comfortable 13.8% return. With the sytemic risk in the banking sector almost at zero, it is a matter of time before the stock trade close to its book value. Thus, this satisfies my first premise of earning more than my Cost of Equity (COE).
On the upside, RCBC is ripe for a mergers and acquisition (M&A) play either as an acquisition target or a recapitalization exercise. In any case, the value will have to go higher compared to where it is right now. Say, we use EPCI as the benchmark; RCBC should then be trading at P26.50 equivalent to 1.3 P/BV. Note that when Union Bank bought iBank, it paid roughly 2.2x P/BV on its acquisition. So, in the long run, there is a chance for RCBC to trade between P26.50 - P40.0 depending on how the M&A scenario plays out.
So, on both ends, RCBC is in a “win-win” situation.
The expected return in putting money into the market is to earn more than the cost of equity (COE)). This is computed by adding the 365-days T-bill rate and the equity risk premium. In the case of the Philippines, its 7.8% plus 5% equity risk premium or roughly 12.8%. The logic here is that if you cannot earn more than the COE, you are better off parking your money in risk-free government securities. That's how the logic works. Investors should simplify their investment objectives by keeping this in mind.
Unfortunately, most people think that they have to hit the jackpot when they invest in the market. Even the Philippine Stock Exchange (PSE) came out with an ad telling investors that they can double their money in the market. Doubling or tripling your money in the market is incidental. In the end it is all about managing your risk. Three key points to remember:
1.) Rationalize your objective vis-à-vis other available investment alternatives
2.) Buy below the intrinsic value of the stock. This separates investors from speculators.
3.) Run your winners; cut your losers.
RCBC is a “win-win” stock
I took note of RCBC and I believe it is worth a second look.
RCBC currently trades at .9x Price to Book Value (P/BV). It is the cheapest stock in the banking sector. I find value in this since RCBC remains one of the top banks in the country. It ranks 7th and 10th respectively amongst local banks in terms of resources and capital
The banking sector trades at 1.6x P/BV. RCBC is the cheapest, while the next cheapest is Equitable PCI (EPCI - P74.50) at 1.3x P/BV. BPI (BPI - P49.0) - the proxy stock for the sector trades at 1.8x.
Both RCBC and EPCI are in the same boat. For the past 5 years, growth has stalled and asset quality has deteriorated. Both banks badly need to recapitalize. The difference is that EPCI has found a white knight in Banco de Oro (BDO). I think it's a matter of time before RCBC can find one.
So on the downside - or in this case, at the minimum, I think RCBC should trade closer to its book value of P20.50. This should give me a comfortable 13.8% return. With the sytemic risk in the banking sector almost at zero, it is a matter of time before the stock trade close to its book value. Thus, this satisfies my first premise of earning more than my Cost of Equity (COE).
On the upside, RCBC is ripe for a mergers and acquisition (M&A) play either as an acquisition target or a recapitalization exercise. In any case, the value will have to go higher compared to where it is right now. Say, we use EPCI as the benchmark; RCBC should then be trading at P26.50 equivalent to 1.3 P/BV. Note that when Union Bank bought iBank, it paid roughly 2.2x P/BV on its acquisition. So, in the long run, there is a chance for RCBC to trade between P26.50 - P40.0 depending on how the M&A scenario plays out.
So, on both ends, RCBC is in a “win-win” situation.
posted by jack galt at
11:55 AM
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