# "Don’t buy AIB shares. Michael Noonan says they’re overvalued"



## Brendan Burgess (17 Nov 2014)

We have a posting guideline where    but the current overvaluation of AIB is so huge and so dangerous for potential investors, that an exception to the ban  is justified. 

At the Oireachtas Finance Committee last week, the Chief Executive of AIB estimated the current value of AIB at €10 billion.  

There are 523 billion shares in issue. This gives a value per share of around 2p. 

The share price today is 10.4 p giving a total value of €54 billion. This makes it  worth around the same as Deutsche Bank , Credit Suisse or Standard Chartered.  In fact it is worth the same as the combined value of CRH, Ryanair, Kerry, Bank of Ireland, Aryzta and Smurfit Kappa.

This share price is artificially high because only 108 million shares are actually held privately.  If the government tried to sell AIB,  and if it could find a buyer, it would get around €10 billion.

Today, Kathryn Hayes reports in the Irish Times 
*Don’t buy AIB shares. Michael Noonan says they’re overvalued*



> “The value attributed to the shares in the stock market at the moment  would put a nominal value of €55bn on AIB, it’s not worth that. So the  shares are overvalued but it’s because of the restructuring. “So I am issuing a kind of a warning to investors. Wait until it’s  restructured before you buy. If you buy now you will lose money.”


Fiona Reddan wrote a good article on the topic back in August, but the share price anomaly has persisted.


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## Steven Barrett (17 Nov 2014)

That was a very good article written in August. 

It continues to amaze me the love people have for Irish banks. It's as if there's no other profit making, dividend paying banks out there in the big bad world.


Steven
www.bluewaterfp.ie


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## Brendan Burgess (19 Nov 2014)

Another good article in today's Irish Times

*Investors can bank on AIB’s overvalued shares falling*



It's interesting to see the responses, which fully justifies why we don't allow discussion of the valuation of shares on Askaboutmoney.




> I just wonder does Noonan know what he is talking about or does he have  any background on finance. This statement seems reckless and might well  keep small investors out which in effect would shore up the banks liquidity. AIB needs investments which is why I  bought 100,000.00 shares. Like the other writer stated, perhaps Noonan  wants vultures to come in and buy up remaining shares for a pittance. What is this Noonan's academic background anyhow? Did he ever go to college after High School (secondary)?


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## Duke of Marmalade (12 Jan 2015)

So AIB will indeed be for sale some time soon.  All this talk of Goldies considering a "revised capital structure" makes me think that private shareholders will after all get considerably more than the "economic value" which has been correctly identified at around €2.  Whether they get the current market price of €8 seems doubtful given Noonan's warning.  However, as I have discussed in another thread, if it thought desirable to be shot of their nuisance value it will be difficult to justify buying them out at less than market; the total cost of this "give away" would be a pittance in the overall scheme of things.  I wouldn't be shorting AIB shares.


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## Dinarius (25 Apr 2015)

Interesting point made on Late Debate (RTE 1 radio) this week about how AIB can offset its boom-time losses against tax. Apparently, this is due to something Noonan introduced in Budget 2014? Not sure what.

Anyway, AIB made €1bn+ profit in 2014 apparently. At current estimates, according to whoever made the point on the radio, they won't pay a cent in tax for about 20 years.

So, how much would you pay for a company making €1bn+ p/a that doesn't have to pay tax for a long time?

Current p/e is 17.

Of course, now that we're on the run-in into an election, the issue of what they're charging for Standard Variable Mortgages is about to be addressed - something that should have happened the day Noonan took office - and this, if anything happens, will affect profits coz SVM payers are their cash cow.

A very difficult one to read. Suffice to say that 10c a share is probably bonkers, but the free float of only 0.2% is seriously distorting real value, methinks.

D.


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## Brendan Burgess (25 Apr 2015)

Hi Dinarius

Where are you getting the figure of 17 for p/e? 

At a price of 9 cents, the market capitalisation of AIB is €47 billion 

http://ise.ie/Market-Data-Announcements/Companies/Equity-Details/?equity=502

Therefore the p/e is 47 times. 

_Interesting point made on Late Debate (RTE 1 radio) this week about how AIB can offset its boom-time losses against tax. Apparently, this is due to something Noonan introduced in Budget 2014?_

I don't think that Noonan did anything in Budget 2014 in relation to this. 
If I have a company which loses €50k in 2012 and makes a profit of €200k in 2013, I pay tax on €150k , which seems right.

AIB has accumulated losses of €20 billion so won't pay any Corporation Tax until it has made €20 billion of profits. 

It's a bit academic anyway, as it's a state owned company paying or not paying tax to the state. 

Brendan


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## Dinarius (25 Apr 2015)

Apologies, I mis-read a page I was reading.

Two takes on p/e....

57, according to Davy... http://www.davy.ie/markets-and-share-prices/iseq/detail?ric=ALBK.I

45.5 according to Bloomberg... http://www.bloomberg.com/quote/ALBK:ID The end-of-year projected p/e of 91.00 is interesting.

The point about budget 2014 was made in Wednesday's Late Debate program, if you want to listen back. It was in the last 20 minutes.

D.


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## Brendan Burgess (25 Apr 2015)

Hi Dinarius  45 or 57 doesn't really matter.  Either way it's grossly overvalued as already indicated by the Minister for Finance. 

17 would also be a very high p/e but could be justified. 

Brendan


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## Brendan Burgess (25 Apr 2015)

We have a posting guideline where  but the current overvaluation of AIB is so huge and so dangerous for potential investors, that an exception to the ban is justified. 
_
At the Oireachtas Finance Committee last week, the Chief Executive of AIB estimated the current value of AIB at €10 billion. 

There are 523 billion shares in issue. This gives a value per share of around 2p. 

The share price today is 10.4 p giving a total value of €54 billion. This makes it worth around the same as Deutsche Bank , Credit Suisse or Standard Chartered. In fact it is worth the same as the combined value of CRH, Ryanair, Kerry, Bank of Ireland, Aryzta and Smurfit Kappa.

This share price is artificially high because only 108 million shares are actually held privately. If the government tried to sell AIB, and if it could find a buyer, it would get around €10 billion._


Just to reiterate, Askaboutmoney is not the forum for speculating about shares. We made an exception for AIB to highlight the huge anomaly in its price and the huge risk it poses to potential investors.

Please don't extend the discussion to the valuation of other shares.

Brendan


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## Brendan Burgess (28 Apr 2015)

I am just back from the AIB AGM

The Chairman said that AIB's current share price values it at 6 times its net asset value.  Similar banks are valued by the stockmarket at their net asset value.  He said  “I cannot think why a reasonable investor would think that this bank is worth six times its net asset value” 

Shane Ross also addressed the issue and called on them to ask the Stock Exchange to suspend AIB's quote. 

Very few of the directors have any shares and those who do only hold a token amount e.g. Tom Foley has €90 worth of shares - or should that be that he has €15 worth of shares?

Brendan


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## Brendan Burgess (17 Nov 2015)

The Irish Times is reporting that the reconstruction announced today will reduce the value of AIB shares from 7 cents by 75% i.e. to just under 2 cents each.

*How much are my AIB shares worth now?*

They fell 20% but the market is still pricing them at 5.7 cents






5.7 million shares changed hands, so that is over €300k worth.  That must be a lot of private investors still buying them.

Brendan


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## Brendan Burgess (18 Nov 2015)

I don't fully follow what is happening, but here are the relevant bits from AIB's announcement:

"It is expected that the 2009 Preference Shares will convert into ordinary shares at a potential conversion
price of approximately 1.7 cents per share. This would value AIB’s ordinary shares at approximately €11.7
billion. The Group is working with the Department of Finance to finalise the terms of the capital
reorganisation which are expected to be agreed in the coming days and may entail some additional measures
to streamline the capital structure including:

An ordinary share consolidation on a 1-for-250 basis in order to reduce the number of ordinary shares
in issue. The share consolidation will round-up shareholdings to the nearest ordinary share where
applicable to ensure that all shareholders who hold less than 250 ordinary shares remain on the share
register of AIB. The share consolidation will reduce the number of ordinary shares in issue post
conversion to approximately 2.7 billion ordinary shares."

From this, it looks as if AIB and the government have agreed that the shares are worth around 1.7 cents each which ties in with the Irish Times report of a reduction in value from 7 cents by 75%.

It seems that they estimate AIB's total value at €11.7 billion, which seems about right and not the €54 billion it was valued at by the stock market this day last year, when the thread started. 

Brendan


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## rob oyle (18 Nov 2015)

It would be nice if a structure was put in place for people with 'original' shareholdings of (say) 1 or 2 thousand were given a low cost way of exiting their investment and realising their capital loss.

As it is, having shares valued at €18 or €72 are hardly worth trading, particularly if you'd have to give your broker extra cash just to sell them!


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## Brendan Burgess (18 Nov 2015)

Hi Rob

A very good idea.  I will bring your suggestion to their attention.

You should probably write to their Chairman as well.

Brendan


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## Brendan Burgess (19 Nov 2015)

I would be very surprised if any institutions were buying them. 

From speaking to people, many believe that "aib is a good company and is bound to recover". They just don't do the maths.  When I tried to short them, there were a lot of buyers. But the company kept all the short sales for their own book, I think. 

I guess that the institutions do the maths.


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## Duke of Marmalade (19 Nov 2015)

Surely, surely, no *rational* investor paid 7, 8, nay 12 cent for a share which everyone who has the most minimal knowledge of these things reckoned as being at most worth 2 cent and with no possible upside. 

Only explanation is that there are *irrational* retail investors who believe that any share worth only a few cents must have more upside than downside.  Now when the 250-1 consolidation takes place the price (currently 4 cents) will go to €10 all else equal.  Presumably even the irrational buyers will then evaporate.


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## Brendan Burgess (19 Nov 2015)

Hi Duke 

When I asked about short selling them, people here advised against. One of the risks was that the government would not let the small shareholders lose money. 

Brendan


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## Gordon Gekko (19 Nov 2015)

Brendan Burgess said:


> Hi Duke
> 
> When I asked about short selling them, people here advised against. One of the risks was that the government would not let the small shareholders lose money.
> 
> Brendan



Hi Brendan

My understanding is that it was not possible to short the stock (for practical rather than regulatory reasons).

Regards

Gordon


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## Brendan Burgess (19 Nov 2015)

Here is an account of my attempts to short sell it last year:

*Is it possible to exploit the "overpricing" of AIB shares?*


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## Dinarius (23 Nov 2015)

Duke of Marmalade said:


> Only explanation is that there are *irrational* retail investors who believe that any share worth only a few cents must have more upside than downside.  Now when the 250-1 consolidation takes place the price (currently 4 cents) will go to €10 all else equal.  Presumably even the irrational buyers will then evaporate.



That made me laugh. Only last night, someone said to me that a major bank priced at 4 cents has to be too cheap. There's a sucker born every minute.

I think I'm correct in saying that the banking sector's average p/e is about 16/17. Until recently, AIB was trading (p/e wise) in the mid-thirties - incredible, but true.

I think it is now still in the high teens, in terms of p/e. For a share that "barks and wears a lead", as they say, this is nuts. 

Factor in the huge spread, and you have a share that is untouchable, I think. 

D.


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## Sunny (24 Nov 2015)

There was a excellent article in the Sunday Times a couple of weeks ago by Brian Carey on how this restructuring basically sucks and amounts to another bailout of the bank by the State. The article is behind a pay wall but it is well worth a read if you can get your hands on it.


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## Duke of Marmalade (24 Nov 2015)

RobFer said:


> I am no fan of AIB but isn't it ridiculous to say AIB is trousering the proceeds. The state will gains billions from the sale of these shares.


A most peculiar comment from _Sunny_ - not his(her) usual.  AIB is *us* (or at least 99.8% of it is) so any "trousering" is to our benefit.  Unless _Sunny_ means that (s)he thought this money would be used to forgive poorly performing debts - that would suit some of course, but not the taxpayer in general.


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## Sunny (24 Nov 2015)

To clarify, I am not making wild claims about any trousering! The article explains the reality of what this announcement means. The consequences of the financial engineering employed are a lot different than what the Government would like us all to believe when they announced a small windfall for the State. It also quiet rightly points out the difference in how BOI and AIB have dealt with their preference shares. I will try and do up a summary of the points. Just thought it was really interesting take.


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## Sunny (25 Nov 2015)

The Government have made a big deal about this payment but the detail of it is interesting. 
Remember this relates to €3.5 billion of preference shares that incurred a step up because AIB didn't repay last year so they actually owed the State €4.4 billion on the shares. The EU gave approval for AIB to repay €1.3 billion of these shares at a cost of €1.7 billion. 
The remainder of the preference shares are to be converted into ordinary shares of AIB. So in reality what we have is our Government selling a interest in a highly profitable and income producing instrument i.e. The preference shares and investing €2.7 billion into shares that Michael Noonan said himself not to buy because they were overvalued. 

The article also points out that unlike BOI, AIB paid one coupon on the preference shares in the five years since they were issued. These missed coupons have also been converted into ordinary stock to the tune of over €1 billion. 

While all this doesn't mean that AIB won't pay back the money eventually, it does mean we will be s long time time waiting for it. The article points out that while removing the preference shares increases the value of the bank, it won't increase it to the tune of €2.7 billion to cover the States investment when they go to sell a piece next year. 

We are getting cash from AIB but we are still bailing them out as well. Hardly reason for the Government or AIB to be clapping themselves on the back.


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## Duke of Marmalade (25 Nov 2015)

Sunny said:


> So in reality what we have is our Government selling a interest in a highly profitable and income producing instrument i.e. The preference shares and investing €2.7 billion into shares that Michael Noonan said himself not to buy because they were overvalued.


_Sunny_ that is so not right that I am disappointed in you  Michael Noonan said the shares were over*priced* by the market.  Getting shares for 1.7cents was a steal, no wonder the price of the shares in free float collapsed.  If anything, current AIB shareholders have cause for gripe.  The market price of these shares was €7.  In any ordinary situation prefs would be converted at market price.  To get a conversion at 1.7c was another steep dilution in the value of the free float.

_Sunny_, whether the original bail out of depositors and bondholders was justified has been argued intensely over the last 7 years.  It is also valid to argue whether the timing is right for the sale of part or all of AIB just now.  But for Brian Carey to argue that this restructuring amounts to another bail out by the taxpayer beggars belief.  Notice how nobody else has run with this theme, not even seasoned baiters like McWilliams.  The restructuring is at worst a technical cleaning up for sale but possibly also reflects a further rip off of existing AIB shareholders by the taxpayer - I'm not complaining.  There is no smoking gun here.


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## Sunny (26 Nov 2015)

Sorry Duke, I am disappointed in you! What professional fund manager would have taken €2.76 billion worth of income generating preference shares with a 8% dividend and convert them into non dividend paying ordinary shares? It has to be done to clear up the mess of a balance sheet of AIB but it doesn't make financial sense as an investment


Bank Of Ireland repaid every preference share in cash back to the State. They repaid every coupon back in cash to the State. During the 5 years that we had the preference shares in AIB, we received a cash dividend once. And that was this year. Every other coupon was converted to ordinary shares. Now another €2.7 billion has been converted into ordinary shares. So instead of having a situation where AIB owes the Government €2.7 billion because the preference shares are basically debt, the recovery of this cash is now completely dependent on finding buyers for this bank who are willing to pay a decent price. You might think that getting ordinary shares at 1.7c is a steal but I will bet you now that when the Government sells a stake in AIB next year, it will be at a discount to what we have invested as buyers will be looking at this conversion.  


This isn't saying that Government has put more money into AIB or will never get it's money back but lets stop with the political rubbish that this represents a huge step in AIB not being dependent on the State and repaying the funds. We are decades away from getting our money back from AIB and this payment that has been hugely publicised was nothing more than necessary financial engineering. We are still bailing out AIB and one only needs to look at BOI to see the difference.


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## MrEarl (26 Nov 2015)

Hello,

Is it possible that the Government have no choice but to start to sell the Bank, so as to remove it from State ownership and by extension perhaps satisfy EU regulations or similar ?

No doubt that the State would benefit from holding it's shares in AIB and claim dividends, given the Bank is now back in profit etc.


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## Brendan Burgess (26 Nov 2015)

Sunny said:


> What professional fund manager would have taken €2.76 billion worth of income generating preference shares with a 8% dividend and convert them into non dividend paying ordinary shares?



Sunny, 

I think that the point you might be missing is that the state owns over 99% of the bank. So it doesn't matter what it does with the preference shares.  The taxpayer  is paying the dividend to itself. It could put the rate up to 20% or it could tear up the preference shares - the taxpayers' position does not change. 

Look at it another way

Let's say that the  AIB ordinary shares are currently worth €10 billion - the state's stake is €12.76 billion when you add in the €2.76 of preference shares.

Now that the preference shares are cancelled, AIB is worth €12.76 billion.

The state's position has not changed. 

Brendan


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## Sunny (26 Nov 2015)

Brendan Burgess said:


> Sunny,
> 
> I think that the point you might be missing is that the state owns over 99% of the bank. So it doesn't matter what it does with the preference shares.  The taxpayer  is paying the dividend to itself. It could put the rate up to 20% or it could tear up the preference shares - the taxpayers' position does not change.
> 
> ...



Of course it matters Brendan. Does the taxpayer want cash to bring down debt or to invest in the economy or do they want a couple of extra billion of AIB shares that might be worth something in 20 years time? Nobody is saying that the State's position has changed. But it does mean that it will take longer to recover the extra almost 4 billion that was supposed to be paid in cash but was instead paid in ordinary shares. Ideally the Government wanted cash just like they got from BOI. The EU said that AIB couldn't afford to repay the shares in cash and pay off the €1.6 billion next year as well. For that reason, the Government had to take shares because they want to be able to sell a chunk of AIB next year and the preference shares would hinder that. That's fair enough but lets not pretend this is great news for the taxpayer. We are only getting back a fraction of the cash that AIB owe us. 
The simply fact here is we have moved from having a debt like instrument here that should be paying €180m a year in interest to a pure equity investment. I am not accusing the Government and AIB of trickery but I am also not going to join the cheerleading now that we own even more ordinary shares in AIB. The bank is still costing us billions.


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## Duke of Marmalade (26 Nov 2015)

Sorry _Sunny_ but you have hit a blind spot here.  The _Boss_ has explained it far better than me.  The restructuring is a clean up.  Fairly neutral financially although, as the collapse of the free float share price indicates, it is a further dilution of those shareholders (they deserve what they get given all the warnings), albeit at 0.2% there is not much more blood to get out of them.

Ask yourself why the usual suspects like Prof McWilliams, Prof Lucey, Prof Morgan, Fierce Doherty, Paul Murphy, Shane Ross etc. have not seized on this Brian Carey theme of a second bail out.  Back off _Sunny,_ you, unusually, got this one badly wrong, but I'll let you blame Carey.


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