Ann: CYBG PLC - First Quarter 2019 Trading Update, page-31

Well, classical valuation theory says that if an enterprise's Return On Capital is equal to its Cost of Capital, then such an enterprise's value should equal the Book Value of its capital.

So I see it exactly the way you do; as I posted around 6 months ago, when I was trying to articulate why I had sold my CYB shares:

"In CYB's case, the essence of the investment case was that, at Price-to-Book of 0.5x, the stock was price like ROE would remain at the then- paltry 5% level to perpetuity. Despite management's clearly articulated strategy to drive down Cost-to-Income, and hence, ROE.

With ROE now approaching 10% (which probably close to CYB's level of sustainability), and with the share price having responded, resulting in P-to-B approaching 1.0, it looks to me like most of the investment out-performance that was envisaged, has been delivered."

Source: https://hotcopper.com.au/posts/34251378/single


Of course that was written before the Virgin Money transaction was completed, so I hadn't taken any revised look at what I thought would be sustainable ROE for the merged entity.

Having now conducted some sort of assessment of the potential financial pedigree of the merged entity, I now think that CYB could achieve 12% ROE (15% is, I think, too libertine) once Virgin Money is fully integrated and all the synergies harvested.

So I am with you on an ultimate exit price of 1.1x to 1.2x book.

But it will be a few years before CYB's ROE will have reached a point which will justify such a premium-to-book value.

In the meantime, while the ROE trends upwards towards that 12% end-game level, I think that a Price-to-Book of 0.9x will constitute a prudent interim (say, 12-month) target price.

Clearly, this is an inexact science, meaning that the discussion is, by definition, indicative rather than prescriptive, but a Price-to-Book valuation of 0.9x yields a target price of around $5.20 per share, so say $5.00.

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