Alior Bank – Innovative, well-run and trading at good valuations

Summary

  • The bank is growing both organically and through acquisitions
  • Well-run and highly rated
  • Synergies from merger and cost-cutting measures allow for margin expansion
  • Stock is trading at attractive valuations despite good prospects

Growing organically and through acquisitions

Alior Bank has grown in the years through acquisitions of Meritum Bank in 2015 and Bank BPH in 2016. The latest merger with the demerged operations of Bank BPH went through successfully. Integration costs were less than expected, synergies greater than expected and the bank now expects synergistic benefits to come in 2018, one year earlier than expected. Alior Bank is now itself a possible acquisition target for Bank Pekao SA although this has not been finalized.

The synergies of the merger augur well for profit margins in the next two to three years. Besides these benefits, the bank is also pursuing cost reductions through automation, e.g. in its back-office processes. Analysts expect net profit margin to expand from 19.2% in 2018 to 21.9% in 2019 and 23.4% in 2020.

Innovative and highly rated

Alior Bank is one of the top 10 large financial groups in Poland. The bank was highly rated, notably voted as the Most Innovative Bank by BAI Global Banking Innovation awards in 2012 and the Best European Retail Bank by Retail Banker International in 2015.

With a not-so-long history of 10 years, it readily embraces innovation in order to better service its customers. The bank plans to invest PLN 400 million in innovation projects over the next four years.

Recently, it teamed up with Berlin-based solarisBank, Raisin and Mastercard to launch a pan-European digital bank in the fourth quarter of this year. This digital bank will allow Alior Bank to deliver multi-currency accounts with international transfers and deposits to all EU citizens.

After the stock had a good run in 2016 and 2017 due to good earnings results, the stock price has fallen by about 13% since the start of the year and now presents a good buying opportunity.

 

Stock Valuation

Despite the favourable prospects, valuations are still attractive. We first look at valuation from the standpoint of popular indicators – Price to Earnings, Price to Sales, Price to Cash Flow, Price to Book and Dividend Yield.

Alior Bank PE Ratio

The Price Earnings (PE) Ratio is the most frequently used valuation indicator for a stock. However, there are times when this ratio cannot be used e.g. when the company reports a loss or profit is so minimal that it results in an abnormally high PE Ratio. Or Net Profit After Tax may be volatile and it is better to use Earnings Before Interest and Tax (EBIT) to value the company.

At the price of PLN67.55 as at 19 Jun 2018, Alior Bank Sa is trading at a PE Ratio of 13.5 times last 12 months earnings.  This is a 22.7% discount to its historical average Price to Earnings Ratio of 17.4 times. (Price based on the historical average PE of the company is indicated by the red line.)

Alior Bank Price to Sales

The Price to Sales Ratio is another commonly used valuation indicator for a stock. It overcomes some of the limitations of the Price Earnings Ratio in that it can be used even when the company is not making a profit or only making minimal profits. However, it should not be used by itself because a company may be achieving sales but not profits.

At the price of PLN67.55 as at 19 Jun 2018, Alior Bank Sa is trading at a Price to Sales Ratio of 2.2 times last 12 months sales.  This is a 19.0% discount to its historical average Price to Sales Ratio of 2.7 times.

Alior Bank Price to Cash Flow

Price to Cash Flow is an alternative method to value shares. This is because accounting profits can be subject to manipulation. Therefore, some investors prefer to value a company based on cash flows generated by the operating activities of the company. It also acts as a reality check to valuation measures such as Price to Earnings and Price to Sales. If a company generates high profits and sales but not operating cash flows, it could be heading for trouble because it is cash that pays the operating expenses. However, the Price to Cash Flow ratio of most firms are volatile and should not be used in isolation to determine the valuation of the stock.

At the price of PLN67.55 as at 19 Jun 2018, Alior Bank Sa is trading at a Price to Cash Flow Ratio of 47.5 times last 12 months cash flow.  This is a 244.0% premium to its historical average Price to Cash Flow Ratio of 13.8 times. However, the historical average Price to Cash Flow ratio cannot be determined with accuracy due to the short history.

Price to Earnings, Price to Sales and Price to Cash Flow ratios all value a company based on what it is generating (i.e. profits, sales or cash flow). Price to Book ratio is different in that it values a company based on what it owns (i.e. its net assets). This is usually a suitable valuation indicator for a financial institution, which frequently revalues its assets and liabilities, or a company with huge asset base e.g. utilities company.

Alior Bank Price to Book

At the price of PLN67.55 as at 19 Jun 2018, Alior Bank Sa is trading at a Price to Book Ratio of 1.3 times current book value.  This is a 18% discount to its historical average Price to Book Ratio of 1.5 times.

The company does not have sufficient dividend history to determine valuation based on dividend yield.

Everybody has his favourite valuation indicator. Although most people would use Price to Earnings Ratio to value stocks, others believe that profits are open to manipulation and Price to Cash Flow is a better measure. Yet others rely on Price to Sales Ratio to value companies as this measure can be used even at times when the company is not profitable. Another way to value companies would be to value its assets and typically the Price to Book Ratio is used for that. Income investors who invest mainly for dividend income like to use the Dividend Yield to find companies that are undervalued.

We believe that each of these methods has its pros and cons. Therefore, we reckon that the best way is to use all five indicators and let empirical data find us the best possible combination of these five indicators that explains the stock’s price.

To find out more about our valuation methodology, click here.

Using a combination approach, we found a Composite Valuation Indicator that explains the stock price better than any of the standalone indicators above. And it gives you one signal to decide whether to buy, hold or sell the stock. The problem with using different standalone indicators is that they may give you different signals. Some may tell you it is overvalued while some tell you it is undervalued. This is no help to an investor who must make a definite decision whether to buy, hold or sell the stock.

Alior Bank Composite Valuation Indicator

Based on the Composite Valuation Indicator, the stock has a Target Price of PLN92.02 within a 12-month period. Our Target Price represents upside of 36.2% based on stock price of PLN67.55 as at 19 Jun 2018.

We recommend that investors start to take profit after upside of 25%.

Other Considerations                                                                                                  

Of course, in deciding whether or not a stock is attractive, it is more than determining its valuation. We need to consider other aspects of the stock such as growth, earnings quality, financial condition, operational excellence, cash flow, technicals, etc.

It is difficult to find a stock that is attractive valued and still pass every single criterion of the investor with flying colors. At times, we need to make certain trade-offs. For a full quantitative analysis, you could refer to this report.

Conclusion                                                                                                

We believe that Alior Bank SA is an attractive stock which is trading at attractive valuations. It is a well-run bank and highly rated by independent parties. The bank has shown its ability to grow organically and via successful acquisitions. In addition to revenue growth, investors can look forward to margin expansion coming from the synergies of the mergers and from internal cost-cutting measures.

For a full quantitative analysis, you could refer to this report.

 

Source of Data: Valuation charts are from the ProThinker Stock Report. Company description, historical financial statements data and price data are from gurufocus.com. Estimates are from gurufocus and/or 4-traders.com – Thomson Reuters.

Disclaimer: This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither ProThinker nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of ProThinker. Copyright(c) 2018. All rights reserved.