What is a fair price for the AIB shares?

[Brendan Burgess]

Note: We are making an exception to the rules on discussing share prices for AIB. This is because the brokers have been told not to publish any analysis before the IPO is completed.

However, this is a very limited exception. You should contribute to this thread only if you have read the Prospectus or Investor Presentation or to provide a link to some other published commentary on it.

The thread will be very heavily edited. Only information and analysis will be allowed. Noisy comments, rumours and gossip will be deleted.

Disclosure: I do not have and will not be buying any bank shares, other than a handful of shares in AIB(6), BoI(550), and ptsb(70) to enable me to attend the AGM.

Brendan

I attach my analysis of the AIB shares.

None of the brokers has published any meaningful analysis which is astonishing given that it's the largest IPO in Europe so far this year.



Conclusion and valuation

	Pessimistic	Optimistic
Reliable Earnings per Share	22 cents	29 cents
P/E ratio	10	10
Valuation	€2.20	€2.90
Add excess capital per share		€1.00
Valuation	€2.20	€3.90

As the price is expected to be towards the upper end of the €3.90 to €4.90 range, it is overpriced and should be avoided.

Bank of Ireland has adjusted EPS of 23 cents, which at the current share price of 23 cents gives it a P/E of 10.

 

[MrEarl]

Hello Mr. Burgess,

Delighted to see this thread and also your calculations.

Did you get the EPS from the Bank's prospectus ?

I would also agree with the multiple of 10x (at a max, given there is a reasonable chance that the Bank's NIM will reduce over the next 2-3 years).

Notwithstanding the above, I think logic will temporarily go out the window on this one.

 

[Brendan Burgess]

Did you get the EPS from the Bank's prospectus ?

Yes.

Brendan

Notwithstanding the above, I think logic will temporarily go out the window on this one.

Agreed. The share closed at €5.85 on Friday. Even if you are optimistic, it's hard to see how it's worth €4.90.

Even if it's worth €4.90 and there is a 15% increase just after the flotation, it would bring it to €5.60.

But when the professional analysts start looking at the share and start publishing their results, it should reflect the true underlying position.

Brendan

 

[Brendan Burgess]

Interesting article in the Meath Chronicle adopting a roughly similar approach to mine:

NEST EGG COLUMN: Should I buy AIB shares in the upcoming flotation?

I would be very interested in links to any other articles, especially ones attempting a valuation of the shares.

Brendan

 

[Brendan Burgess]

According to Joe Brennan in the Irish Times

AIB bosses hold fire on share purchases until after IPO

"A number of [broken link removed] directors plan to buy stock in the bank after it floats later this month, having agreed not to participate in the initial share sale to avoid any perceived conflicts of interest, according to informed sources."

How is there a conflict of interest? I fully understand why they did not buy shares in the secondary market when they were artificially overvalued. But if they are being offered at a fair value now, why don't they buy them?

Brendan

 

[Brendan Burgess]

Joe Brennan has quoted from a report by
US brokerage Keefe, Bruyette & Woods

AIB: One bank, two views, as IPO looms

which concludes that AIB’s €4.90 price target may be too cautious, saying: “If the market was willing to put a value on the potential for additional excess capital or discount stronger growth rates, there would be additional upside versus our current price target.”

 

[Protocol]

The price range has now been reduced to between 4.20 and 4.60.

https://www.rte.ie/news/business/2017/0620/884251-aib-shares/

 

[Sarenco]

And here's the formal announcement of the new expected price range -
https://aib.ie/content/dam/aib/inve...cement-in-respect-of-expected-price-range.pdf

Looks like institutional investors have decided to fill their shoes!

20 June 2017
Allied Irish Banks, p.l.c.
AIB Share Offer
Announcement in respect of expected Price Range
Allied Irish Banks, p.l.c. (the “Company” or “AIB”)notes the guidance released today by the Joint Global Co-ordinators, in connection with the initial public offering of AIB announced by the Minister for Finance on 12 June 2017, which states that the initial Price Range of €3.90 to €4.90 per Ordinary Share as set out in the Prospectus has been narrowed to €4.20 to €4.60 per Ordinary Share and that books are covered in the upper half of this revised range. As indicated in the Prospectus, the Offer Price and the Offer Size will be determined by the Minister for Finance and are expected to be announced on or about 23 June 2017. The Pricing Statement, which will contain, among other things, the Offer Price and the Offer Size, will (subject to certain restrictions) be published by the Company in due course on AIB’s website.

 

[Brendan Burgess]

An interesting description of the cat and mouse game in today's Indo

Investors reject upper end of AIB price range

"One fund manager at a large London institution pointed out the relatively small stake on offer mitigates against a premium. He added the poor performance of Permanent TSB's shares after the Central Bank tightened mortgage rules two years ago remains a market bugbear. The Government sold 25pc of PTSB in 2015 at €4.50 per share. Weeks later the stock sank below the issue price and is yet to recover.

Some investors also highlighted that AIB will not immediately enter benchmark indices, like the MSCI, that global fund managers are in effect bound to track, meaning there is no urgent need to buy into the float.

The final hours of an IPO are characterised frequently by a cat-and-mouse game between bankers managing the deal and institutional investors as the two sides trade off on price and share allocation. According to sources, on this occasion, the balance of pricing power is thought to rest largely with institutional fund managers.

Meanwhile, retail investors submitted their orders last night. It is understood bankers targeted a final haul of €500m from this end of the market. That's less than the €800m to €900m targeted two weeks ago from ordinary investors."

 

[MrEarl]

Hello,

While AIB is not being included in the likes of the MSCI right now, it will be in time.

As the second largest bank in our country and a vital part of the money transmission system, it's going to be in a lot of fund managers portfolios regardless of whether it's included in the MSCI or not. Some managers will ague it's an infrastructural asset (as an integral part of the money transmission system), others will argue that it will do well on the back of Irish economic growth and a low interest rate environment, it will pay out a regular dividend, offers more diversification across the banking sector (with less exposure to the UK than BoI in the run up to Brexit) etc. etc.

Ultimately, I don't think fund managers really care about the price it launches at given it's not their money they are investing. They generally invest for the long term, so their focus is more likely on portfolio diversification, ensuring they have exposure to large liquid shares, regular income from dividend streams and so on. Long term, it should grow alongside the ISEQ in general...

At a likely price of €4.40 per share, the stock looks far from a highly attractive investment opportunity.

I expect that there will be pressure on AIB's NIM over the next 24 months, it's over exposed to homeloans (in terms of percentage of it's loan book) and also over exposed to the Irish market in general, with limited potential for growth outside of Ireland (unless by merger - which seems unlikely in the next few years). Add to that the fact that it's circa 10-years since the beginning of the economic collapse and the Bank still has excess €8bn of loans in FSG !

 

[Brendan Burgess]

it will do well on the back of Irish economic growth and a low interest rate environment, it will pay out a regular dividend, offers more diversification across the banking sector (with less exposure to the UK than BoI in the run up to Brexit) etc. etc.

I would agree with a lot of that, but that is not the point.

I think that AIB is a good bank, but its reported earnings for 2016 and 2015 have been "enhanced" by non-recurring items.

Any company might be a good company with great long-term prospects, but the share price might still be too high.

Brendan

 

[Duke of Marmalade]

According to Joe Brennan in the Irish Times

AIB bosses hold fire on share purchases until after IPO

"A number of [broken link removed] directors plan to buy stock in the bank after it floats later this month, having agreed not to participate in the initial share sale to avoid any perceived conflicts of interest, according to informed sources."

How is there a conflict of interest? I fully understand why they did not buy shares in the secondary market when they were artificially overvalued. But if they are being offered at a fair value now, why don't they buy them?

Brendan

What the likes of Fierce Doherty are on the look out for is evidence of a taxpayer giveaway. So news that AIB directors had filled their boots and made a quick windfall gain leaves them open to the charge that they deliberately played down the Bank's prospects so as to make a quick buck. That's a fairly obvious "perceived" conflict of interest.

 

[Protocol]

The price range has again been narrowed, for the second time.

Now 4.30 to 4.50.

 

[Sarenco]

Yep, it looks like it's going to be priced @~4.40. Great news for the taxpayer.

Meanwhile, it looks like applications from retail investors are going to fall some way short of initial expectations (the "Burgess Effect" at work?) and that retail investors will, on average, get around 75% of what they applied for.

http://www.irishtimes.com/business/...public-well-below-early-speculation-1.3128300

 

[Brendan Burgess]

Hi Sarenco

It's not so much the Burgess Effect as the Noonan Effect.

The shares have been made available to individuals, but the brokers were told not to actively market it to individuals. No analysis to be published until after the IPO is over.

I would say that Finance is delighted that the institutions are buying the shares and not individuals. If they go up, the individuals will take the credit for being savvy investors. If they go down, they will blame the government for selling them a pig in a poke.

Brendan

 

[Brendan Burgess]

That's a fairly obvious "perceived" conflict of interest.

Hi Duke if they bought a significant amount of shares, maybe.

But if each director had applied for €10,000 worth and made a small profit, I really don't think anyone would care that much.

Brendan

 

[Sarenco]

I would say that Finance is delighted that the institutions are buying the shares and not individuals.

Oh, absolutely agree.

Politically the Minister obviously felt that he couldn't entirely preclude retail investors from participating in the offer but he clearly didn't want a repeat of the Eircom floatation.

Remember at one stage he advocated compensating retail investors that lost money in that floatation? Not his finest hour.

I still think it's great news that the taxpayer is going to net €3billion+ from this sale, valuing the State's holding in AIB at ~€12billion. That didn't look very possible a few short years ago.

I also still think you might have put off a few folk that were on the fence...

 

[Brendan Burgess]

The price has been set at €4.40 share.

Trading begins at 8 am this morning.

They had demand for 4 1/2 times the amount of stock on offer.

Retail investors will get 100% of their application up to €50,000 and 53% of the balance.

Brendan

 

[Brendan Burgess]

The government appears to have got the pricing spot on.

From what I can see,they opened at 4.67 a 6% rise. Just enough to avoid accusations of selling it too cheaply.

http://www.ise.ie/Market-Data-Announcements/Companies/

Brendan

 

[MrEarl]

The government appears to have got the pricing spot on ....

Yes indeed Mr. Burgess.

That said, it's interesting to not that the IPO was oversubscribed by 4.5 times and yet, there wasn't significant upwards pressure on the share price after the share issued on Friday morning. Even if half the level of demand (i.e. 2.25 times) carried through into the markets, I would have expected demand to push the price up higher for the first day's trading.

It also appears that there may have been a floor informally set for the share (even if only for Day 1), as it seems to have remained at €4.65 for all of Friday afternoon. It will be interesting to see what happens to that price over the next couple of days.

Conditional trading just means that trading can happen with deferred settlement until the listing on stock exchanges becomes official (expected on Tuesday). That means if you buy the stock today, the earliest you can settle the trade is Tuesday. Retail investors will usually not be allowed trade during this period.

Hello Sunny,

The text below came from Cantor Fitzgerald, it was on the bottom of an email they sent to investors when they issued notification of the share price for the IPO on Friday morning ... so I am not sure you are correct in what you have said above. Settlement date through your broker is typically 2-3 business days after a trade regardless of the share, AFAIK.

* Conditional Basis means that the seller (Department of Finance) reserves the right to withdraw and cancel the offer prior to admission to the Office Exchange Lists (Irish Stock Exchange “ISE” and London Stock Exchange “LSE”) which is expected to occur on Tuesday, June 27th at 8am. In the event that the seller exercises this right, all AIB subscription monies received will be returned to investors without interest. Furthermore any AIB share transactions entered into during this period of conditional dealing, i.e. from Friday, 23rd June to Tuesday, 27th June will be voided and any ensuing loss will be for the account of the person entering into such an AIB conditional share transaction and Cantor Fitzgerald Ireland Limited will have no liability thereof.