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

Brendan Burgess

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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

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


 
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.
 
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.
 
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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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
 
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
 
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
 
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
 
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
 
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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Hi Rob

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

You should probably write to their Chairman as well.

Brendan
 
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.
 
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.
 
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
 
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
Click to expand...

Hi Brendan

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

Regards

Gordon
 

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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