Brief valuation of Wide Bay Australia Limited's assets

This post is a follow on from a previous post in which we conducted a Brief valuation of Wide Bay Australia Limited's earnings.

In this post we will broadly separate Wide Bay Australia's banking and non-banking businesses and determine a value for them.

The banking business

Loan book, deposits, provisions and securitisations are main components of the banking business. To determine a value for the banking business we need to identify net profit margin to net interest income made from the loan book.

For a start we assume that all expenses incurred are related to maintaining the loan book. Thus, to obtain NPBT generated by the loan book, we subtract all non-interest revenue from the organisation's NPBT. Seventy percent of this amount is the loan book's NPAT, implying a tax rate of 30%. Using the loan book's NPAT figures thus derived and net interest income available from financial statements, we obtain the loan book's NPAT margin to net interest income for each financial year. The loan book's NPAT margin to net interest income for the period FY1999 through to FY2008H1 averages 13.37%.

For the purpose of this exercise, we will assume a net interest margin of 2%. With the current loan book standing at $1596m, 2% percent equals $31.92m, which is the net interest income. Based on the average loan book's NPAT margin to net interest income, net profit will be approximately $4.27m. Value of this income stream at a discount rate of 4.4% is $97.05m. With circa 30m shares outstanding this equates to a value of $3.24 per share.

The non-banking business

If the banking business were sold, deposits, provisions and securitised loans will be taken over by the buyers. Thus, we remove these items from the latest balance sheet to obtain a value for the non-banking business. The resulting net assets of $174m equates to $5.8 per share, which may be optimistic. Pessimistically, we can completely remove the value of investments, tangibles and other assets leaving us with $30m in net assets, resulting in $1 per share.

As a whole

Optimistic value for the whole business is around $9.04 per share. If we consider the lower value for non-banking parts and the banking business being sold for half price, we get a floor of $2.62 per share.

On the basis of NPAT averaged over 9.5 years of available history, the business is worth around $7.58 per share. Based on an average NPAT for the past 5.5 years, the business is worth $9.50 per share. Based on last year's NPAT, the business is worth around $12.12 per share. And based on forecast provided by management, the business is worth around $13 per share.

As the business has demonstrated growth with a prudent management, it is unlikely that the business will backtrack its steps forward. Therefore, it deserves a premium to valuation based on NPAT averaged over 9.5 years, while maintaining a reasonable margin of safety to valuation based on latest or forecast performance. As a reasonable price, full value of the business calculated by separating its banking and non-banking components may deserve merit.