Here’s how to value the Westpac share price

A grey-haired mature-aged man with glasses stands in front of a blackboard filled with mathematical workings as he holds a pad of paper in one hand and a pen in the other and stands smiling at the camera.

A grey-haired mature-aged man with glasses stands in front of a blackboard filled with mathematical workings as he holds a pad of paper in one hand and a pen in the other and stands smiling at the camera.Recent events in the United States involving Silicon Valley Bank have weighed heavily on the Australian banking sector and the Westpac Banking Corp (ASX: WBC) share price this month.

This has left the banking giant’s shares trading at $21.58, which is almost 13% lower than their 52-week high.

Is the Westpac share price good value right now?

In order to know if the Westpac share price is good value, we will have to find a way to undertake a valuation. Luckily, the team at Goldman Sachs has provided its valuation model to help us on our way.

Firstly, many investors like to use price to earnings ratios when valuing shares. However, this is not something that Goldman uses for bank shares. And there are strong arguments out there that this is the correct approach when looking at the sector.

Instead, its analysts use a “DCF & P/NTA vs. ROTE” valuation methodology. Don’t worry if that doesn’t make a lot of sense, I’ll take you through it now.

The DCF stands for discounted cash flow. This is essentially the sum of all future cash flows, discounted to take account of the time value of money. On a per share basis, Goldman Sachs estimates that Westpac has a value of $29.27 on a DCF basis.

However, this only makes up 50% of its valuation methodology. So, we still have to throw in the second part: P/NTA versus ROTE.

This is the price to net tangible assets versus its sustainable return on tangible equity. The latter is the same as return on equity but excludes intangibles such as goodwill. Goldman estimates the bank’s sustainable ROTE to be 12%.

In light of this ROTE, the broker believes Westpac’s shares deserve to trade at 1.4x NTA. Which, based on its NTA estimate of $18.70 per share in FY 2023, equates to a figure of $26.20 per share. This will make up the remaining 50% of its valuation.

If we combine the two together, we get a valuation of $27.74 for the Westpac share price.

And with its shares currently fetching $21.58, this implies material upside of greater than 28% over the next 12 months. No wonder Goldman has the bank’s shares on its conviction list with a buy rating!

The post Here’s how to value the Westpac share price appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has positions in Westpac Banking. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Westpac Banking. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

from The Motley Fool Australia

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