Question of the Week

Questions of the Week

Co-founder of the Switzer Report
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1. What are your thoughts on the NAB share purchase plan?

I like the look of it because: 

  • The maximum issue price of $14.15 is 9.5% lower than the current market price of $15.64 (13/5); 
  • Traditionally, investing in bank shares at a discount to book value has been a sound investment strategy. NAB’s adjusted book value at 31 March (adjusted for the $3bn institutional placement) was $17.13 – the subscription price is thus 82.6% of book value; 
  • According to consensus estimates (source: FNArena), the major brokers have a target price for NAB of $18.28 per share. It is trading on a multiple (PE or Price Earnings ratio) of 13.7 times forecast FY20 earnings, but only 10.9 times forecast FY21 earnings; 
  • The brokers forecast total dividends of 68.3c for FY20 (30c has already been paid) and 100.6c for FY21. At $14.15, this puts the stock on a prospective yield of 7.1%; and 
  • New CEO Ross McEwan is in the driver’s seat at NAB and over the next few years, should improve NAB’s competitive position and standing with customers. 

The major risk for NAB is that the impact of COVID-19 (bad debts, fees forgone, reduction in lending volumes) is materially worse than the Bank has provided for, resulting in lower cash profits or even a net loss. In a worst-case scenario, the Bank needs to raise more capital to remain solvent. 

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