My personal interest was piqued by some of the recent articles on this topic. In particular Patrick Hosking in the Times argued in favour of taking up the rights because he could easily see Lloyds treble or quadruple in value over 10 years (http://business.timesonline.co.uk/tol/business/columnists/article6945355.ece).
I was sceptical. Since Mr Hosking didn't quote any numbers to back up his argument, I thought I'd do the exercise myself.
Post-Rights issue Lloyds will have 63 million shares outstanding. At the current price of 56p that's a market cap of £35m. They are raising £12.5bn of capital, added to their existing tangible book value of £30bn gives a new tangible book value of £42.5bn. So they currently trade at a P/TBV of 82%.
Let's assume:
- Lloyds pay no dividend for 10 years.
- Lloyds earn a RoE of 12%.
- At the end of 10 years Lloyds trade at a P/E ratio of 12.
That means that Lloyds will be trading on a P/TBV of 1.5 at the end of 10 years.
The compounding effect of retaining all those earnings mean that Lloyds' TBV at the end of 10 years will be £132bn, and therefore its market cap will be about £200bn, for a share price of 317p.
Even if we assume that Lloyds pay out a third of their profits as dividends, that would still suggest a share price of 218p, or pretty much a four-fold increase over 10 years.
So in conclusion, to my surprise, I think Mr Hosking has a good argument.
1 comment:
I have faith that Lloyds will profit once the dust from the rights issue has settled. I was reading today that 92% of private investors took up thier rights. So either two things will happen those investors will wait out till the share price rises then sell out or they will sit tight. My feeling is that the majority of them will sit tight. This can only mean good things as the economy recovers.
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