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Capital market firms such as MAI are hard to value. This is because the rules they face are different to other companies, which can impact the way we forecast their cash flow. Asset managers, for example, must hold certain levels of capital in order to maintain a safe cash cushion. Examining data points like book values, as well as the return and cost of equity, may be fitting for evaluating MAI’s true value. Today I’ll take you through how to value MAI in a reasonably useful and straightforward way.
What Model Should You Use?
Let’s keep in mind two things – regulation and type of assets. Australia’s financial regulatory environment is relatively strict. In addition, capital markets generally don’t hold large amounts of tangible assets as part of total assets. This means the Excess Returns model is best suited for calculating the intrinsic value of MAI rather than the traditional discounted cash flow model, which has more emphasis on things like capital expenditure and depreciation.
How Does It Work?
The main belief for this model is that equity value is how much the firm can earn, over and above its cost of equity, given the level of equity it has in the company at the moment. The returns in excess of cost of equity is called excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (0.094% – 8.5%) x A$0.35 = A$0.0032
Excess Return Per Share is used to calculate the terminal value of MAI, which is how much the business is expected to continue to generate over the upcoming years, in perpetuity. This is a common component of discounted cash flow models:
Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)
= A$0.0032 / (8.5% – 2.3%) = A$0.052
Combining these components gives us MAI’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= A$0.35 + A$0.052 = A$0.40
This results in an intrinsic value of A$0.40. Relative to today’s price of AU$0.52, MAI is currently priced above its true value. This means MAI isn’t an attractive buy right now. Pricing is one part of the analysis of your potential investment in MAI. There are other important factors to keep in mind when assessing whether MAI is the right investment in your portfolio.
For capital markets, there are three key aspects you should look at:
- Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like leverage and risk.
- Future earnings: What does the market think of MAI going forward? Our analyst growth expectation chart helps visualize MAI’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether MAI is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on MAI here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.
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