Feature Stories | Apr 18 2006
Continues from Part I.
Admittedly, all the banks are facing slower growth in mortgages, but business spending and lending should remain strong and Bank of Queensland has already flagged this is one of its key expansion fields for the near future. Add a booming Queensland economy and a successful rollout of new branches in NSW and other states and few would disagree with Liddy’s statement the bank remains "a long term growth story in a market that is essentially non-growth".
Where, then, is the twist in this story?
The key word we are looking for is "relativity". No, Einstein has nothing to do with it. It’s all about price and momentum.
Bank of Queensland shares had appreciated by circa 60% over twelve months before falling back recently. Investors could have bought them for $10.50 a piece in April last year. They reached $16.50 a few weeks ago. In a way, that stellar performance made up for the fact that the shares hadn’t done anything the prior year that followed an outstanding year 2003.
The shares are currently trading in the mid $15s. This compares with the average price target as set by Thomson Financial on the basis of 14 stock broking analysts of $14.50. Probably of more importance is that these 14 believe Bank of Queensland will report more benign financials in the second half of fiscal 2006. Let’s assume for a moment these experts are currently underestimating the momentum behind Bank of Queensland’s operations. This is a more than just feasible scenario (remember the biggest sales in a week quote).
Thomson Financial’s average EPS forecast for FY06 is $0.78. This means investors are currently paying a multiple of just under 20 times this year’s profit estimate. If one would revert to the more cautious figures in the market this would rise to a multiple of 22. The average PE (price/earnings) multiple for the banking sector as a whole is currently 15.11, according to Thomson. Anyone spotted the problem yet?
Thomson also tells us the average twelve month price target is currently $14.50, a difference larger than the bank’s projected dividend payout with today’s share price.
And the story doesn’t get better from here on. At the interim result presentation, David Liddy explicitly acknowledged management’s guidance for the year of cash EPS growth by 10-12 % applied to a revised $0.674 for last year (AIFRS, the new accountancy standard) and not to the bank’s last reported $0.702.
Assuming all the experts have done their homework correctly by now, and Thomson has had it all entered correctly in the system, this implies the market is already anticipating Bank of Queensland will beat its own guidance as the projected $0.78 EPS figure is 15.7% above the revised year-on-year reference. If the bank would only achieve 12% EPS growth its current average PE multiple would grow to 20.5, if it only achieves 10% growth the figure lands just under 21.
This, in a nutshell, is the reason why the sexiest bank in Australia, while steaming ahead on all accounts operationally, has now landed at the bottom of securities analysts’ preference table. Bank of Queensland has joined Leighton Holdings (LEI), Austereo (AEO) and Qantas (QAN) as the lowest recommended stocks in the Australian share market. It has a reading of minus 0.6 on the FN Arena Market Sentiment Indicator. Only Leighton fairs worse with a minus 0.8 reading (minimum coverage of five analysts).
FN Arena’s average target price stands at $14.63, which is a little bit higher than Thomson’s, but nothing to get excited about. Six out of ten leading experts rate the stock a Sell. There are no Buys.
Expect at least one minor acquisition by Liddy’s team over the coming year. The BOQ MD has said repeatedly the bank remains on the lookout to add niche opportunities, such as the Orix debtor finance business it purchased in December.
The Bank of Queensland board will meet in June to possibly review its current strategy. It will be interesting to see at what the share price is by then.