Being the third largest bank in Malaysia, Public Bank Group (PBBANK) reported a 4% increase in net earnings for first quarter of financial year 2013. The profit is mainly supported by the group’s stronger annualized domestic loan growth as well as low impaired loan ratio. Besides, Public Bank recorded a return on equity of 22.2%, which is the best among domestic lenders.
Public Bank has been awared as the Best Bank in Malaysia for many years.
The group, founded by Tan Sri Dato’ Sri Dr. Teh Hong Piow in 1966 is well-known for its strong fundamental performance and steady growth across the years. Needless to say, the counter PBBANK is definitely one the top pick for fundamental investors.
Let’s check out what’s the target price of PBBANK here.
Data that is required for calculation are current EPS, earnings growth (or equity growth) and future PE.
Current EPS: RM1.112
Earning growth: 10.98%
Source: Financial Times
Future PE: 14.1695
1. Future EPS
Future EPS is required to find out the future price of the counter. We will make use of the earning growth estimated by analyst. The formula is:
Future EPS = Current EPS * (Earnings Growth year)
E.g. Assuming you want to calculate the future price of PBBANK for 10 years, replace the value in the formula:
Future EPS = 1.112 * (1.1098 10)
The earnings growth rate picked from finance site is an average growth rate. We make an assumption that it is the rate that the company will grow in 1 year. Hence,
Future EPS = 1.112 * (1.1098 1) = 1.234
2. Future Price
The formula to find out the future price is quite straight forward as we multiply the result of Step 1, Future EPS by Future PE, which is retrieved earlier from finance site.
Future Price = Future EPS * Future PE
Future Price = 1.234 * 14.1695 = 17.49
3. Target Price
In order to calculate the target price, which indicates the current fair value price, we wiil do reverse calculation with the future price derived from Step 2. The formula is:
Target Price = Future Price / (Rate of Return year)
Corresponding to calculation in Step 1, the number of year equals to “1”. Rate of return is the minimum acceptable rate of return expected to get in certain number of year(s). Let’s say we are expecting a minimum of 15% return from PBBANK next year. Here’s how the calculation goes:
Target Price = 17.49 / (1.15 1) = 15.2
As of time of writing, the last closing price of PBBANK is RM16.70, which is 10% higher than the target price. Besides, the price is also currently on the high side of its 52 weeks range. As such, it is not the right timing to buy PPBANK now. Patience is a virtue.