Originally Posted by
Fiordland Moose
W69 your post got me to thinking. As TRA is for the most part a non bank financial lender and insurer, price to book and price to NTA are truly relevant, not withstanding the whack of money it makes from auto retail and credit collections.
I dabble a bit in financials and the concept of 'warranted price to book' or 'warranted price to NTA' are very common in financial services (eg banks, non banks, insurance) as a primary or secondary valuation methodology. Basically, the concept provides for a multiple of book or nta with the guts of the formula being (ROE less stable growth rate) / ( cost of equity less stable growth rate). You can just multiple that multiple to the current book or NTA figure to derive proxy for what the firms equity value/marketcap should be.
It's a nice cross check although some research analysts will use it for their primary valuation methodology for pure play banks / financial instos.
The concept seems to correlate well to current spot prices for TRA on a NTA basis and less so on a price to book perhaps given the amount of intangibles on the balance sheet.
Warranted Price to NTA:
I can't seem to upload an excel file so if any nerds want the excel file PM me.
The warranted price to NTA approach provides a price of $4.13. The inputs are all laid out methodically and hopefully clearly/objectively in the analysis. I was surprised at my derived cost of equity but the NZ risk free rate has shot through the roof (up 150bps or 100% since August 2021) and my derived equity beta was surprisingly high but I stand by it.
TRA isn't a pure financial services firm so this approach will be of less relevance to say heartland, but still an interesting cross check. It doesn't suggest any upside to current spot prices.